Good Luck to Professor Tim Congdon & That L ETTER + Departure!
Good Luck to Professor Tim Congdon
- I believe he offers UKIP members their best hopes for the future.
Tim Congdon is an economist, educated at Oxford University, with a long record of commenting on public policy issues, including writing sympathetically about the monetarist approach to macroeconomic policy. He has considerable experience working in the City of London and was the founder of the macroeconomic forecasting consultancy Lombard Street Research. He has also held a variety of academic appointments. Between 1993 and 1997 he was a member of the Treasury Panel that advised the Conservative government on economic policy[1]. In recent years, he has expressed considerable skepticism about the direction the European Union has been moving in.
Congdon has been a prominent defender of the UK Government's action to lend to Northern Rock claiming that it made money for the government.[2] He is also a small shareholder in Northern Rock, a fact that he has scrupulously disclosed publicly when writing on this issue.[3]
Since May 2008, he has been the economic correspondent for Standpoint magazine.[4]
Professor Congdon was the unsuccessful UKIP candidate for the Forest of Dean constituency in the 2010 General Election, obtaining 5.2% of the votes cast.
UKIP members consider Tim Congdon to be the only noticeable intellect in the Party Leadership and seen as having an interest as a reformist candidate, who would try to clean up the party, you can well imagine the forces ranged against him who would welcome him with all the joy of a pig in a Mosque.
You may recall his statement in late 2009 when he sided with some of the honest members of the senior members of UKIP, whose letter is below! There was a general level of disappointment in the realisation as to just how much the MEPs and their parasites 'had been 'captured' no longer seeing that their job was in Britain for Britain, not in Brussels for themselves'
Here is the letter he signed in opposition to the changes Farage tried to force on The Party. Changes to the constitution which were designed to give dictatorial powers to the Party Chairman. Farage has never forgiven any of the signators for this challenge to his personal fiefdom and his very personal control of his 'Milch Cow'.
Dear UKIP member,
We are writing this letter more in sorrow than in anger. At a time when every effort should be directed to our June election campaign, the NEC is wasting time and money on divisive and controversial changes to the UKIP constitution. It is now holding a members' referendum on this.
What is worse, the purpose seems to be to make it easier to get rid of members at a time when we should be concentrating on the reverse - expanding our membership. The changes will stifle freedom of expression within the party and reduce and weaken the power of members:
Amendments 6 and 19 (VOTE 2) The changes abolish the annual business meeting. Members will be deprived of their current absolute right to vote annual on the Party's accounts at a meeting of all members and to receive annual reports from all national officers. Yet the Party should belong to its members and the leadership should be accountable to them.
Amendments to 14 (VOTE 4) the changes will abolish the democratic right of members to elect a Disciplinary Committee at the annual business meeting. Instead a Disciplinary Panel of three will be selected arbitrarily by the unelected Party Secretary from a "pool" of about 55 people, themselves appointed by regional committees. Further changes will give the unelected Party Chairman (appointed by the Leader) arbitrary powers to suspend temporarily any member for any reason without a hearing.
These changes are worthy of the EU itself - reducing accountability and democracy.
Given that the leadership launched this attack on members' rights and is now asking your view, we feel it right to present the case against. We ask you to vote AGAINST all changes but particularly Vote 2 and Vote 4. The other changes are simply needless.
In less than six months voters will be choosing their MEPs. UKIP should be campaigning now for a major breakthrough. Yet it is low on the opinion polls and short of campaign funds.
The NEC discussed the coming campaign for the first time only a few days ago. Meanwhile it has been wasting energy on feuding and squabbles. It then launched a witchhunt for imagined enemies within. Two NEC members elected by the members were summarily kicked off the NEC; their crime apparently being to express their own opinions (and absolutely nothing to do with the BNP as some have tried to imply). The deputy treasurer was similarly removed. Ordinary members have been thrown out without being given the right to any hearing.
We condemn this navel-gazing and misdirection of effort. It must stop. We call on the leadership to accept that any democratic party is bound to have a spread of views; that intellectual debate can be healthy and that, amazingly, the Leader, the Chairman and the NEC may not always be right.
As prominent UKIP members we call on the Party to unite, dispose of this distraction quickly by voting against these unneeded changes and concentrate on the proper task in hand.
Yours sincerely
Sir Richard Body, was MP for 39 years
Tim Congdon CBE, leading economist
Roger Knapman MEP, former Party Leader and MP
Dr. Eric Edmond, elected NEC member
Piers Merchant, former UKIP Chief Executive and MP
Bruce Lawson FCA, former UKIP Treasurer
Martin Haslam FCA, former UKIP deputy treasurer
Del Young, elected NEC member
Dr. David Abbott, elected NEC member
Unfortunately despite his high level of academic economics and his consumate ability at critique of economics for worthy journals and the media Tim Congdon has one very big drawback as a leader - he is not a good speaker and suffers from quite surprising nerves which he has a tendency to calm before hand and at times excessively calm afterwards! Sadly despite his experience he is rather uncharismatic, typifying the accountant, mathematician, statistican, economist stereotype of a boring bean counter!
The inability to communicate with ease leads some of this propensity to explosive temper tantrums but perhaps the calming of nerves before hand may explain why this is apparent - some may remember Tommy Cooper whose nerves eventually led to full blown alcoholism and vodka on his cornflakes!
Tommy Cooper was by far a better commedian but as an economist of some repute I would assume Tim Congdon would count his shots and ensure he kept his powder dry ;-)
That said it would be a pleasant change to have an honest man in office who had an interest in Britain, the Party has survived to date without ever having a competent leader but there is at least every reason to believe Tim Congdon could be trusted.
If for no other reason than this report in:
The Telegraph in May 2009
"Meanwhile, one of its most distinguished former supporters, the economist Tim Congdon, has left Ukip, claiming that it has been "captured by the European institutions" and neglects its British Eurosceptic supporters."
Firstly before making the obvious statements - May I congratulate Gerard Batten for putting the wellbeing of UKIP before his personal interests, by standing down as a leadership candidate, it is well apreiated that he got 26% in the mock leadership election of 2009 without Farage standing but clearly he would have cost Tim Congdon votes had he insisted in standing.
Congratulations to Gerard Batten who has by this action done the very firast thing that I have ever been able to praise him for!
Let us hope this is a lesson to others who might still be tempted to stand - though I fully appreciate that David Bannerman is neither a real candidate nor the real man he claims to be he is as ever, once he emerges from The OLAF enquiry into his fraudulent use of public money as ever he was - merely butt boy for Farage, standing to split the vote of the informed UKIP members who can not be bought off by salary or status and know enough to know what a catastrophic leader Nigel Farage, has been, is and might still sadly be!
The exception of course is the hope that Mad Monkton might yet stand as nothing would favour Tim's campaign more as clearly he would attract some votes based upon his Father's title and other people's Climate Change & Global warming debunking, which never seems to be acknowledged by this serial liar (no wonder he supports Farage!). Let us hope he stands as his votes will in the main come from Farage's normal (I use the word with caution) voters.
Now for the obvious - Good luck to Tim Congdon though I fear he has an uphill battle ahead - I would like to see Tim Congdon win of the candidates on offer as he is the only candidate who brings any integrity, gravitas, competence or personal success to the Party. Congdon has made considerable money by the use of his own brain and unlike Farage was a success in banking and finance selling his business to Lehman Bros. as I recall, for a substantial amount and being retained as a consultant/adviser.
Tim Congdon may not have the charismatic qualities that sell well in the village hall, but he has the competence to impress a City audience or annual sales meeting of a major Financial services concern or banking Group or Inns of Court gathering and happily able to address the Mansion House or Brughes Group with gravitas and not be caught urinating in the plant pots with a drunken Godfrey Bloom, or involved in chavvery in a lap dancing club with Farage and his parasites - with greater self respect he can lead the party forward to its next phase rather than endlessly repeating the mistakes of Farage, Bannerman, Dartmouth, Monkton and the like so stupid they expect different results and are completely reliant on dishonesty and luck!
I have grave doubts over Steve Allison who based on his own track record I would trust as far as I could kick him - it was he who so recently advocated Pan EU Political Parties, it was he who was angling for a run at MEPship, it was he who was all over Farage like a cheap suit - when surrounded by undeniable corruption and dishonesty did this little man ever speak oit?
Not a man I would trust and one I would not be remotely surprised to see acting in character and using all he has learned to act in his own personal interest by betrayal at the most crucial time - Tim Congdon would seem to stand for EVERYTHING that Steve Allison has NOT stood for! Before all else consider: CLICK HERE
Tim CONGDON:
Today Prog. Recording BANKS "WERE NOT BUST AT ALL CLICK HERE
IEA London - Central Banking in a Free Society CLICK HERE
Lord Pearson having failed to raise money for UKIP has I understand been assured of comprehensive backing for a new 'Think Tank' come 'Pressure Group' in his own name and is expected to take with him the near useless James Pryor and Bridget (death) Rowe ( couldn't he take scum like Mick McGough, Douglas Denny, Mark Croucher, David Bannerman, Marta Andreasen, Trevor Colman, William Dartmouth, Paul Nuttall, Dimwit Duffy and the rest who so befoul the party?) - this shows just how distrusted UKIP is with Farage and the claque of clowns and nere do well crooks he has gathered around him as his personal body guard.
A spell of leadership by Tim Congdon would be much along the lines of Jeffrey Titford as leader - namely a safer pair of hands than any of the others on offer!
I also believe Tim Congdon would have the advantage over Jeffrey both on age and intellect.
Ben Bernanke needs fresh monetary blitz as US recovery falters
Photo: GETTY IMAGES
Two-year rates fell to 0.52pc after a further batch of grim data hinted at a sharp slowdown in the second half of the year. Factory orders fell 1.2pc in June, while consumer spending fell flat.
The savings rate has risen to a one-year high of 6.4pc as Americans adapt to the new era of austerity and build a safety buffer against unemployment. "Households are repaying debt at a rapid clip," said Gabriel Stein from Lombard Street Research. "With an output gap at around 3pc, the US economy could move into outright deflation in 2011 for the first time since records began."
The latest figures follow a sharp drop in GDP growth to 2.4pc in the second quarter, prompting fears that the economy may stall altogether as the boost from fiscal stimulus and inventory cycle both fade.
The data has strengthened the hand of the Fed board led by Ben Bernanke as it pushes for a return to quantitative easing (QE), against fierce resistance from the Fed's regional hawks.
A closely-scrutinised article by the Wall Street Journal – described by some analysts as kite-flying by the Fed board – said the bank may announce some form of compromise at its crucial meeting next week, agreeing to roll over bonds purchased during the credit crisis rather than letting them expire gradually as previously planned. This would entail a slow shift from mortgage debt to Treasury bonds.
The Fed would keep its balance sheet steady at $2.3 trillion (£1.44 trillion). The effect would be neutral rather than adding any fresh stimulus. It has already dubbed 'QE lite' by Barclays Capital, as opposed to full 'QE2'. However, Fed watchers say it would be a crucial first step in a broader shift in policy.
The bank has bought $1.7 trillion in bonds. Experts say key governors have been mulling a net increase to stave off possible deflation, pencilling in a rise in the balance sheet to $5 trillion in extremis.
Mr Bernanke said on Monday that US states have been "battered" by a budget crisis, forcing them to cull staff. This is holding back recovery. "We need to be careful about tightening too quickly," he said.
Jan Hatzius, chief US economist at Goldman Sachs, said fiscal policy is turning contractionary, draining 1.7pc of GDP next year after adding 1.3pc in early 2010. This leaves the Fed as the last line of defence.
"The disappointing economic data has clearly taken a toll on the confidence of at least a few Fed officials," he said, citing warnings by James Bullard from the St Louis Fed that the US risks a Japan-style deflationary trap. As the keeper of the monetarist flame within the Fed family, Dr Bullard is usually viewed as a hawk.
However, the Fed presidents from Richmond, Philadelphia, Kansas, and Dallas fear that US monetary policy is moving into dangerous waters, stoking asset bubbles rather than letting the debt purge run its course. The risk of moral hazard is growing as markets assume they will be rescued. "I don't think there is any role for the Fed at least in the near term," said Philadelphia chief Charles Plosser last week.
Tim Congdon from International Monetary Research said the Fed has been wasting its powder by using the wrong mechanism to inject monetary stimulus. Instead of buying bonds from pension funds, insurance companies and other bodies outside the banking system, as the Bank of England did with its £200bn gilts purchase, it has been buying from banks. This method has different effects. It has gained less traction because banks have sat on "dead cash". This has not increased the deposits held by companies and households.
"A really powerful way for the Fed to boost the economy is to buy bonds directly from the public, which will increase the quantity of broad money. They won't do that because they have a totally different model and in my view they are confused about the transmission mechanism. If they bought say $1.5 trillion of long-dated Treasuries from non-banks I believe they would get the US out of its liquidity trap very quickly," Mr Congdon said.
Bruges Group Speech by Tim Congdon + Douglas CARSWELL MP
To view Tim Congdon's Full Powerpoint Presentation on The EUrozone CLICK HERE
I’m going to be telling everyone I told you so and the older one is that most people remember what one said you know think of what you said in your 30s and your 40s because such pearls of wisdom they’ll remember you 20 years later but they don’t. So I’m going to recall some things that I said in 1998.
But in fact the central topic is really this question, can a monetary union where you have several countries, several governments sharing one currency, can that work without movement towards political union, meaning one government, one parliament, one set of laws and so on.
This was always the core question with this experiment, Europhiles called it the European construction, this was always the key issue.
Many Eurosceptics said that it couldn’t work without political union, so did many enthusiasts for the project including such people as President Mitterrand and Councillor Cole and they saw monetary union as something that would act to bring in political union over time.
There were some other people actually who said this can go on forever without proper political union and for quite a long time now they’ve appeared to be right. What I think there was never any question about was that with full political union monetary union was feasible.
And I wanted to say this for a couple of reasons, one was that in the 1990s there was obviously none of this, there’d just been German monetary union and political union, in fact monetary union I think was just before the political union and at any rate they basically went together and although it was a rather messy process it is clearly there for good and everyone’s announced that it can work.
But there was also centralisation of taxing, all centralisation in taxes in Germany applied to all of the Lander and the whole of the country and there’s also enforced centralisation of much of government spending.
So there was never any question about that and the second thing I want to say is that I did say right up 1997, I didn’t think this thing was going to happen because I thought frankly that they were like bills and they kind of have a vision, have a façade you know local columns and they were political but they hadn’t sorted out the plumbing. And you know after a good time it will start to smell and then it’s no good.
Anyhow it’s been there now for over a decade, effectively it started on January 1st 1999 and you know there was this façade and much signs of of working and it wasn’t smelling actually plumbing fixed the old problem.
But let me assure you ladies and gentlemen the plumbing isn’t working, there is a smell and in terms of the question of this thing it’s about to break up and if I’m asked for a timetable I will say the next three to six months and I’m going to try and justify that conclusion in the next few minutes.
Before I do that I’m going to be just a little bit self-indulgent and go through some things that I said and some aspects of the whole process.
When you’ve got a government, a single government, single countries and government usual monetary jurisdiction, the government can borrow from the central bank a great deal of money and if this is on excessive scale you get inflation.
When you’ve got a standard monetary jurisdiction, one government, one central bank, one money, one legal system etc etc, its very clear what the cause of the problem is, its government borrowing from the central bank, that government is to blame, that central bank is to blame so its clear what’s going on.
But the monetary union when you’ve got 16 governments, if each government borrows too much from the central bank is that government to blame for excessive inflation? I don’t think so it’s too small.
So all governments and have got an incentive as far as they can to borrow from the central bank, to be in that sense financially responsible and you’ve got a sort of free value problem.
Now that problem could be anticipated and it was anticipated by a treaty agreement on the size of budget deficits and also a prohibition on government borrowing from central bank as the 1992 Maastricht Treaty but for a number of reasons this Treaty was never really credible and I wasn’t the only person to make these points, but if governments had an excessive deficit, a deficit that breached what’s called the Stability and Growth Pact, also known as the Stagnation and Grief Pact, if there had been excessive deficits then they would be obliged to lodge sums of money which would receive no interest and there would be a fine imposed. The fine would increase the budget deficit actually paid by the government that was responsible.
But the extreme, suppose the government took no effective actions, would the Union instil these from the monetary union as was always the trend. The Treaty said nothing about the mechanics of expulsion.
Then what happens if a number of European countries with excessive deficits, they’ve all got excessive deficits, you have a blocking amendment a blocking majority on Ecofin but also by the way the government announced a VCV so that the countries can put together a vote to outvote well Germany in practice.
In the extreme the high deficit countries might outnumber the low deficit countries so the financial delinquents control Ecofin or the governing council of the ECB. In that event the incentive of every European government is straight forward, cheat on the public finances, maximise the deficit and to hell with the inflation risk.
The answer, there has to be a single federal government, there has to be a centralised treasury and so on and then monetary union has led to political union.
The central bankers are very powerful people; they need to be kept in check. So by the way are commercial banks, they’re also very powerful people and banking is a very political industry and so there has to be some accountability to the legislature, maybe the executive, maybe some combination of the two but in the eurozone you’ve got these 16 governments, you’ve got this Treaty, you’ve got this rather weird structure of the European Central Bank and the euro system with actually 16 central bank members and its very clear that the ECB is not accountable to any national government. Its true enough that Trichet is prepared, to refuse an invitation to talk to the French Parliament, its true enough that he does give evidence in the European Parliaments but that there may still be massive questions about the status of the European Parliament relative to the national Parliaments and also of course the national governments and so on.
So again we’re going to be in crisis, what is likely to happen is that the Maastricht Treaty would have to be revised, there would be new powers of European Parliament to discipline the European Central Bank political and monetary policies etc etc and by the way that’s more or less what’s happened. There is the Lisbon Treaty that has given more powers to the European Parliament and clearly intended by some people that the European Parliament is a kind of proto-parliament for the entire Union, in other words a monetary union has again led to a political union, another argument that has the same conclusion.
The cost of printing these things is a fraction of the £20 that its worth. The difference between the two is called seigniorage. Now the central banks also make profits, it may surprise you that they do actually, the banking institution is profitable but they make profits.
Who owns these profits? Who owns the seigniorage? Who owns these central bank profits?
Well in Britain there is a single Government, there is a single Parliament, there is a single set of laws governing this particular subject and there is a single central bank. So there’s no two ways about it, ultimately if the Bank of England make a huge amount of profit, that actually benefits the British Government and the British taxpayer.
Again however there is in the eurozone 16 governments, 16 central banks, they of course, their seigniorage there is also interbank profits and losses, sometimes these profits and losses are arise because of businesses in Greece or in France or in Italy, but actually how much business in Greece, in France, in Italy, how do we distribute this between the different nations?
So again you get this pressure for some federalisation, some cooling, some political union to follow monetary union.
And then another argument, you see all these arguments have the same conclusion. In America in the Great Depression the people lost a lot of money in keeping money in supposedly a very safe place, in the banks, bank deposits did not pay out 100 cents in the dollar. Since then its been accepted across the industrial world and everywhere really that public policy should be organised to ensure that the depositors receive back 100 cents in the dollar, 100 pence in the pound and so on.
Now this doesn’t occur by magic, these public deposits are protected in the first instance by the assets of the banks but suppose that something goes wrong with the banks and then you have a chain of security, there’s the capital of the banks themselves that officially deposit, capital of RBS and Barclays and so on in our country, if something goes wrong with that with one bank another bank may move in and buy it so the capital of the whole banking system is relevant. We also nowadays tend to have in Britain we have got it depositor insurance fund into which the banks contribute so if something goes wrong in a small building society, which has happened, then this fund is tapped to make sure depositors get back 100 pence in the pound.
Then all these are being exhausted, the capital bank is being exhausted, the other banks don’t want to take over the bank in trouble, the deposit insurance agencies is also passed all its funds, then the central bank can help, it will take on a big risk getting involved in a situation like this but its there but when all of these have gone all that’s left is the government. So the ultimate guarantor of the 100 pence in the pound, the 100 cents in the dollar is in fact the government.
Here it’s fairly clear, you’re a citizen of the UK, you have a deposit in a British bank, you’re protected by all of these elements and all of these links in the chain, the chain of security, Eurozone.
You have maybe it’s a French bank with operations in Spain, by the way if its actually a German individual that has got an account with this French bank in Spain and something goes wrong with this French bank in Spain or maybe it goes wrong with the Spanish bank but anyway where is the chain of security and which central bank or which government, which deposit insurance agents?
And so you get pressure for a unification of the whole area. The banking system is in crisis, resources of the commercial bank, the deposit insurance agency and central bank had been swept away by a tidal wave of global losses the answer of course the government.
The tax raising powers that support the banking systems is theoretically simple. In the final analysis the government would make sure the bank deposits were repaid in full but this obligation is not without limits crucially the government would in a particular nation is most comfortable when it protects deposits made by citizens of that nation and quite bluntly think about our Government and depositors of Icelandic banks, think about our Government and depositors with VCCI, yeah and the Government wanted to help them but the truth of the situation was that they were the responsibility of you know the Emirates in the case of VCCI, Iceland in the case of the Icelandic banks. And then this is across the entire Eurozone, huge pressure for political union to support monetary union.
So we’ve got here, and they are these issues which were kind of dormant for a decade are now are now live issues. The story of exactly how we got to where we are today is a fascinating one but I have got a finite amount of time even though Douglas Carswell isn’t here yet, and so I’m going to just focus on some particular aspects of the unsustainability of the current situation.
I may be rather technical and I apologise for that. What you need to understand is this idea of a central bank which central banks they issue the notes that are used all over the eurozone, they also have got banks as customers and the banks settle their own imbalances between themselves through accounts at the European Central Bank. The euro system is actually a Central Bank of Ireland, the Bank of Spain and so on but they’re all part of the ECB and they settle their imbalances through accounts of the ECB. So the Central Bank, like any other bank, has got the most holders and it’s got depositors in the form of banks with it.
And then on the other side of the balance sheet it holds various amounts of assets but in particular for current purposes it lends to some banks and it also holds Government securities. Now I know it’s not supposed to hold Government securities under the terms of the Maastricht Treaty, it’s really complicated and I’m going to ignore that for the moment and just say it has both loans to banks and holds Government securities.
Now I’m going to cut a long story short and I’m going to simplify radically but I want to get this over to you. I’m going to say, this is evidently true but that the principle note holders and the principle depositors are French and German, maybe Dutch, they’re North European and they believe in certain things sound finance and all the rest of it and the assets are Greek Government securities, Portuguese Government securities, Spanish Government securities, loans to Italian banks, loans to Portuguese banks, loans to Irish banks.
Now I’m simplifying but what I see here is the nature of the forces that currently might be about to rupture the system. That’s simplified and it’s the guts of what’s now going on.
It is the recognised job of the Central Bank to help banks that have difficulties funding their assets, it’s supposed to do that, the Bank of England was supposed to have done that job in 2007/2008, it did in the end but it did it very badly. That is the job of the ECB and it is doing it.
To some extent also the Central Bank should be bankers to the Government, there is also part of it despite the Maastricht Treaty and there are German problems with this but lets look at this.
The big problem with large amount of public debts is as follows. You know Britain had a public debt that’s as high as the GDP, high as its national output in 1815 after the Napoleonic wars, in 1918 after the First World War and in 1945 after the Second World War but in all cases the interest rate was around about 3% so the interest payments on the debt were about 6% of GDP. That’s quite a lot of money but actually people were prepared to pay the taxes to pay the interest on the debt. That’s 6% GDP.
In the case of Greece, the public debt has risen, rising all through the last 10 or 15 years, risen to about 120% of GDP. Now until the last few months they’ve been cheating, they weren’t disclosing that it was 120% and they were saying it was more like 80/90/100% and the interest rate on Greek Government debt was a bit higher than that and the German Government debt was not much.
So you had a debt that was supposed to be 100% GDP and the interest payments say were about 4/4½%, so the interest payments were about 4/4½% of GDP. So people paying taxes to pay the bond holders and so on. 4% GDP it’s alright.
Now the truth was that the debt was 120% of GDP and they had a huge budget deficit. The deficit was in fact about 12% GDP when they said it was about 6. So this thing was 120% and moving up to 140/150%.
What do you do if you’re holding Greek Government debt, you sell it and the price goes down and the yield rises and this is the story of the yield on 10 year Greek Government debt in the last six to nine months. You see it started off about 4½% and these monthly averages, it was 9% in May; it actually for one or two days went up to over 12%. So imagine, you’ve got a trajectory where the public debt is going to be 150% of GDP and the interest rate is 12% so the interest payments on the debt are 18% of GDP.
In other words you the Greek taxpayer are required to pay taxes equal to a fifth of everything you produce in order to service the national debt. You’ve got to pay all the pensioners, you know you’ve got to pay everything else, all the subsidies, everything else the Greek Government does and this debt is rising, completely unsustainable.
Now the only way of stopping this, a genuine Government economist to slash Government spending, get the deficit down or some help, get that bond yield down. And what happened over the weekend of the 8th and 9th May was that Sarkozy threatened Merkel... actually it was three Frenchmen, it was Sarkozy, it was Trichet and Strauss-Kahn behind it they threatened Merkel and said if you don’t agree to this France is going to leave the eurozone so Merkel gave in. She agrees that on the morning of the 10th May, the ECB could buy Greek Government Bonds, completely breaching the Maastricht Treaty.
The Bond yield fell 8%, crippling. What is the Bond yield today, well by the way there was a Greek Government deal that raised some money where it raised some six month money which was actually oversubscribed as a bit under 5% and there was all this spiel about relieve the markets, the Greek Government raises six month money at 5%.
Please you can’t have... you’ve got your whole debt that size at six months, so they have actually got some money in the bank now to see them through the next few weeks and months given to them by the EU.
What is the yield on tending Government debt at the moment, it was over 10%, it’s gone back up from after a fall from 12 to 8 to 10 and Trichet said we can’t keep on buying Greek Government bonds.
It’s clearly finite they can’t keep on buying this stuff bit by bit. And it is just a matter of weeks and months. I mean if there really are even more convincing cuts in Greek Government spending and all the rest of it and the Bond yield holds isn’t too high, I don’t think so, it’s over. And if you’re simply talking about weeks and months it’s not very long.
Now Spain is actually in some ways a much sadder case because the Spanish did actually have strong public finances right through until 2008. What was happening in the Spanish case was they had a banking system, remember there was a long boom in the property market in Spain, people having holidays there, people going to live there or emigrating into Spain from North Africa, increasing population, building new hotels, new houses, new second homes and so on.
This boom was financed largely by Spanish banks and other banks operating in Spain which in turn were borrowing from the international banking system in practice in fact largely from Asian banks. Spain was running a large current account deficit and you can see this line it just goes up and up you know like that alright and that is Spanish banks’ external borrowings.
We then get to the middle of 2007 and this international wholesale market closed. So the Spanish banks had got to either find other sources of funding or reduce their assets and get some of the developers to repay the loans, sell off the houses, sell off the office blocks, sell off the hotels and repay the loans or find some other source of funding.
Now there were various sources they might go to and to some extent those were Spanish public, Spanish Government but actually the lender of last resort is the central bank which is none other than the European Central Bank in the particular from of the Bank of Spain.
Well since the middle of 2007 you can see that line has gone sideways. Spain in fact at the end of last year, the Spanish banks were not that heavily indebted to the ECB, they had managed to source other kinds of funding more or less, they weren’t growing their businesses in the same way and the Spanish economy was growing but in the last three months they had been borrowing the only place they can borrow is from the European Central Bank.
The European authorities are in a bind. Ireland went through a very similar process.
Ireland, the same story basically but an even more dramatic turn, to some extent the UK is in the same situation, in the Irish case, there’s the Irish banks also borrowing heavily from the inside wholesale market.
They really were completely stuffed, the banks were completely bust and they had to borrow from there to get the Irish Government to come in to bring some capital in and the Irish banks, half of Irish banks’ funding, half of Irish banks’ liabilities funding from the European Central Bank, liabilities to the European Central Bank. The Irish banking system is about the same size as national output, the European Central Bank’s lending to Irish banks is equal to half of Ireland’s national output.
That can’t go on and Spain similarly is in this situation, not to the same degree but the last few weeks the Spanish banks’ borrowing from the European Central Bank has been rising steadily because they’ve got this funding problem, they’re trying to persuade investors that the Spanish banks has got capital etc. etc. Maybe it will work, it hasn’t really worked up until now, watch this space.
The European Central Bank can’t keep on buying the Government securities of the Greece, Ireland, Italy, Portugal, Spain; it can’t keep on making loans to the banking systems of these countries. When it says no these countries have got an unenviable set of choices but really they are in effect being expelled from this union because I don’t see, since prices are finite, this wonderful thing that economists say the process is unsustainable, it will stop and this will stop. I think we’re talking about the next three to six months.
The other possible way this thing breaks up is actually that Germany, because the Maastricht Treaty has been breached, and I gather there is another case going to the German Constitutional Court, I will be very surprised if the German Constitutional Court just gives in the way that Merkel did and that also is another mechanism by which the eurozone might break up.
Well thank you very much for listening to me. I can assure you that 12 years from now I will again be telling you I told you so but I’m not quite sure what will be the topic but thank you very much.
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