Have they saved the Euro?

Germany has compromised. The bail out funds can be used to refinance banks directly, and to buy state bonds in the second hand markets after all. Although Mrs Merkel says she is against Eurobonds, using the joint credit rating to raise money for any part of the Euro union, she has in effect now agreed to this by the back door.

The problem with the new scheme is that they have to borrow the money to put into the bail out “funds”. If they borrow it on the credit rating of the bail out fund they have a kind of Eurobond. They are going to need to get on with issuing large quantities of debt to build up this fund. If they are going to beef up the funds with larger member state contributions, then Italy and Spain have to borrow more to help augment the fund, as they are around 30% of the total when it comes to credit status and contributions. We now need to watch their progress financing the funds.


  1. Brian Taylor
    June 29, 2012

    What’s this, like getting an advance on one credit card to pay of another,did I catch a report that said we are giving another billion?!!!
    If our ten year bond rate is under 2% can we lend to EU at a higher rate, DO WELL, am I missing something?

  2. Duyfken
    June 29, 2012

    Would someone kindly show me a flow chart of the Eurozone finances, they seem to be so opaque that even the persons pulling the strings apparently do not know how it all works, let alone me, Joe Public.

    1. lifelogic
      June 30, 2012

      I think a chart is not needed.

      You can be sure it is mainly tax payers money and borrowings against your children’s future flowing in and then it all flowing out again into the hands of politicians, civil servants, bureaucrats, criminals, people with the right connections, industries with the right sort of “lobbying” to get grants & anticompetitive laws passed, some bankers and “charities” and the like (with the right “connections”), the BBC and other useful propagandists (and others happy to fly the evil flag for a little grant) and all the other hangers on across the EU.

      1. lifelogic
        June 30, 2012

        Also to all the people perhaps seeking or having had EU jobs like Patten, Kinock, Blair, Cameron, Clegg, Leon Britton, Mandelson and others all sensibly evicted or to be by the electorate.

  3. alan jutson
    June 29, 2012

    So the EU are now going to copy Mr Osbourne and fill the Banks coffers with massive amounts of money.

    Clearly like Mr Osbourne they now also trust the Banks to do the right thing.

    I see from Press reports today, that the LIEBOR rate fiasco, may involve more than 20 banks in many Country’s.

    When you want to get out of a hole, most people would stop digging, rather than carrying on with a plan to get out at the other side of the planet.

    Makes you want to weep.

  4. Kevin Ronald Lohse
    June 29, 2012

    Borrowing more to pay off debt? What a masterful grasp of basic economic theory our would-be European masters are showing!

  5. Gary
    June 29, 2012

    Day after day we read here about the woes of the Euro, while the probably the biggest crime in finance, the admitted rigging of the largest market in the world, does not even get a mention.

    How can we take you seriously ?

  6. matthu
    June 29, 2012

    As Daniel Hannan has said on previous occasions: Europe is giving itself [ another ] transfusion – from one arm to the other.


    No-one is taken in by this.

    The temporary boost to the markets will simply provide investment bankers and hedge funds with another short-lived opportunity to rob tax-payers and pension funds of their capital while the QE necessary to fund the loans will rob future generations.

    None of this of course will jeopardise the gold-plated pensions of our leaders.

  7. Publius
    June 29, 2012

    It’s smoke and mirrors once again.

    As always with economics, when it isn’t clear, the thing to do is to strip out the bamboozling jargon.

    Whose money do they want? How are they going to repay it? Do they now propose to live within their means?

  8. Tad Davison
    June 29, 2012

    In a phrase, oh what a tangled web they weave!

    Tad Davison


  9. oldtimer
    June 29, 2012

    So it looks like a victory for Italy over Germany in Brussels as well as on the football pitch in Warsaw. Reports this morning suggest that the Italian PM said he would not agree the “growth pact” unless he got his bank bail out loans. Obviously he knows how to drive a hard bargain. Is the British PM capable of standing up for UK interests in the same robust way? Or will he always take the soft option, cave in, for the sake of some illusory influence?

  10. APL
    June 29, 2012

    JR: “The problem with the new scheme is that they have to borrow the money to put into the bail out “funds””

    The other problem with the new scheme is that it is illegal according to their own treaties.

    This brings up an important question. Do we want to be part of an organization that makes ‘laws’ one day but ignores the ‘laws’ the next day when it suits them?

    Given that the protection of the law is the only protection people have against tyranny.

    I would say no.

  11. Sue
    June 29, 2012

    Nope. They’ve just prolonged the inevitable and will cause thousands more European citizens to suffer to save “The Project”. That’s all they really care about, power.

  12. Atlas
    June 29, 2012

    As we know the Devil is in the detail. I note that subsequent meetings of finance ministers still have to take place. Does the imminent arrival of the Summer Holidays have anything to do with this announcement I wonder?

    It is all another step toward the Holy Grail of a European State.

  13. Michael Read
    June 29, 2012

    Surely, the story is three words: banks, banks, banks.

    Been there before, I know. You would split them and force the sale of bits that don’t fit/make money.

    But now Libor/Eurobor? Collar the lot.

    1. Lindsay McDougall
      July 1, 2012

      Barclays bank is not guilty of the biggest interest rate fixing scam. HM government is borrowing very cheaply from the markets because of the ultra-low base rate and QE, at the expense of businesses wanting to borrow and of pension funds.

      Mr Cameron, first remove the beam that is within thine own eye.

      Barclays’ crimes were in late 2008/09 at a time of great financial stress. So whose behaviour was worse – that of Barclays, who borrowed from the Arabs and manipulated an interest rate, or that of RBS and Lloyds/HBOS, who help out their begging bowls and asked for them to be filled with taxpayers’ money without limit?

  14. Lindsay McDougall
    June 29, 2012

    Mrs Merkel will tell the German electorate that there is no new money on the table, that it is just another way of distributing the funds to keep the payments off national balance sheets. She may be mistaken. Just watch the debts of these Spanish and Italian (and French?) banks grow before our very eyes. All sorts of horrors will now crawl out of the woodwork. Of course, Germany could still veto any increase in the size of the overall bail out funds.

    What beggars belief is that ANYBODY, whether EU institutions or national governments, should bail out these failed banks. They are failed institutions. They are run by bad businessmen. What possible reason is there to preserve them? All that needs to be done is to ensure that shareholders suffer before depositors and creditors do. That is the law of capitalism. Banks are NOT special. Other banks and financial institutions, including new market entrants, will be only too happy to take over the custom.

  15. MajorFrustration
    June 29, 2012

    And where is the growth money coming from – circa E130Bn – dont tell me its will have to be borrowed. What a laugh – well it would be if it were not so serious.

  16. NickW
    June 29, 2012

    When one reads the substance of the announcements rather than the hyperbolic press reports, the answer is no; they haven’t saved the Euro.

    The summit achieved good headlines and nothing else. The proposed solution is in the future and has substantial conditionality attached to it. Events are moving faster than the solution can possibly be realised.


    1. NickW
      June 29, 2012

      This is the crucial point;

      From Der Spiegel

      “The terms of the agreement state that aid will only begin flowing to the banks once an effective European banking supervision mechanism, under the auspices of the ECB, has been put in place. That will take some time.”


      I would be surprised if Spain did not have many of its own instances of irregularity and possible criminality in its banking system. I do not think any European Government, (particularly Germany) will allow money to flow to Banks unless they are sure that they are supporting institutions which are beyond reproach.

      It could be that a there are many Banks which will not qualify for assistance and that time will run out before the Banks have been sufficiently well audited to allow funds to flow.

  17. Mike Stallard
    June 29, 2012

    The root of the problem is this:
    To get re elected, the politicians in all European countries have to promise things that the voters actually want. The easiest things to promise seem to be hand outs of cash and very material and highly visible buildings. And that costs.
    The welfare states which we all enjoy in Europe are surprisingly expensive and they actually encourage people to go onto the dole or to abuse the system. Not everyone does, of course, but there is an air of taking a lot and giving very little in exchange.
    The education system (I saw it in Spain) very much encourages people to think of themselves as ladies and gentlemen who go to university and then become professional people – on the state.

    That is the real problem.

    Mucking around with getting more money in is not going to address that. Reducing taxes, ending the “castle of lies” and cutting back the government will. And Germans do not want to pay for Southern Europeans – whoever should they? They have a vote too and have already frightened Frau Merkel.

  18. Leslie Singleton
    June 29, 2012

    They might have saved a few ghastly immediate bankrupties but I don’t see how shuffling debt on the decks of the Titanic is going to save the Euro. On any basis whatsoever there is only so much money that Germany or anyone else can lend. What might make a difference is for a way to be found for Germany to transfer some of its huge competitive advantage to the likes of Greece but I cannot see a mechanism by which that could happen even if the Germans wanted to do it which they don’t.

  19. Bert Young
    June 29, 2012

    The German people will have their say next year ; up to then the Support Fund will have been used enough to expose Germany far more to the ideal of a Common Europe , and , provide enough evidence whether they wish to diminish their wealth . Angela Merkel has been forced to give in ; I suspect the German voters will not thank her and will push her out . The underlying infection will quickly overtake the sticking plaster and , it will be back to stage one again .

  20. BobE
    June 29, 2012

    Isn’t this still kicking the can? How long before the money runs out again?. A month!

  21. peter davies
    June 29, 2012

    They have just bought time. This still doesn’t solve the architecture problems of the Euro

  22. Richard1
    June 29, 2012

    The commentary on this is insightful. It has been announced that this is good news ‘because the funds will not count towards governements’ borrowings’. As you point out above, where else is it going to come from? Meanwhile the airwaves are repleat with left-leaning economists – Krugman, Stiglitz, Skidelsky etc – all asserting, de haut en bas, that anyone who disagrees with them must be a fool…the problem is lack of demand and the solution more government spending. The normal spurious comparisons with the 1930s are invoked. No mention of whether the burden of tax is too high, whether high and rising debt/GDP ratios matter, whether such state directed spending would be well-judged, why it would lead to an upsurge in confidence etc. As ever, the BBC is a ready mouthpiece for this guff.

  23. Denis Cooper
    June 29, 2012

    I assume that if the EFSF/ESM have difficulty selling their EFSF/ESM bonds to private investors to borrow enough money for the bailouts, then they’ll resort to supplying those bonds as at least part of the bailouts.

    So maybe a distressed bank will provide a bond to the EFSF/ESM in exchange for the EFSF/ESM bonds, and/or maybe holders of distressed eurozone government bonds will accept EFSF/ESM bonds as payment for selling those government bonds to the EFSF/ESM, and those who receive the EFSF/ESM bonds will either sell them into the market, or use them as collateral for loans from the ECB.

    Provided everything turns out OK in the end and those who’ve been bailed out repay what what they owe then the EFSF/ESM will be repaid and will be able to pay out on its bonds, and the ECB will be repaid, and taxpayers in the stronger eurozone states won’t lose out and may even make a small profit; but if it doesn’t turn out OK in the end then those tapxayers will be landed with a potentially massive bill for making up the shortfalls.

  24. merlin
    June 29, 2012

    All we ever here about regarding the EU is borrowing, lending and how much this or that country owe to the bail out fund etc. What you never hear is how fast an individual european country is growing and how economically successful european countries are. It seems to me the latest eurobond idea is a glorified ponzi scheme in the euro money-go-round farce. As I have previously stated this could drag on for 10 to 20 years and we could still be asking when the EU will start to actually demonstrate economic growth, will it be 2032? The euro is a complete disaster and the EU has already failed, and managed to destroy democracy in the process.

  25. Alan Wheatley
    June 29, 2012

    When listening to the BBC Radio 4 report I wondered where the money was coming from, but seems such a vital consideration was not part of their analysis. I see you have confirmed my suspicion – borrowed!

  26. Robert Christopher
    June 29, 2012

    “Have they saved the Euro?”

    Yes, until the next summit, but at some cost.

    1. Robert Christopher
      June 29, 2012

      From the Times, today:
      “David Cameron today challenged his party to take a more optimistic approach to Europe as he vowed to fight to change Britain’s relationship from the inside and praised the “benefits” of EU membership.”

      From the inside of what, a mental institution?

      For that is what the EU is!

  27. lifelogic
    June 29, 2012

    Who in their right minds would finance the funds? So I assume it will be largely unaware taxpayers and future tax payers as usual. Let us hope that this time Cameron won’t mortgage the UK’s taxpayers and their children still further. Enough billions have gone down Cameron’s, Osborne’s and Darling’s drain already.

  28. Leslie Singleton
    June 29, 2012

    And in this Euro world of robbing Peter to pay Paul, these “funds” will, subject to their own funding, for there is no real fund worthy of the name, be used to buy bonds of countries whose (real) borrowing costs have soared. No doubt they are hoping there is enough money in the world ready to “fund” this. And when does this become plain old rigging the market?

  29. matthu
    June 29, 2012

    david cameron says:

    “For those of us who are practical Eurosceptics, who know there is a real benefit from being engaged but are frustrated by some of the ways the relationship works, I see lots of reasons to say the argument is going in our direction.”

    And then fails to provide any reasons. Perhaps someone reading this blog will provide a list?

    And to be clear: the perception we are safeguarding something we already enjoy is not a benefit from remaining engaged. In fact, if history is anything to go by, there is usually no assurance that we will not subsequently negotiate away our current enjoyment for some other “safeguard” in the future.

    What we want from David Cameron is a clear list of reasons why he thinks the argument is going in our direction i.e. why he thinks we are actually gaining something and not just postponing the date when we capitulate and give up everything we have ever held dear.

  30. Normandee
    June 29, 2012

    So the secret is lending it straight to the banks !!! These must be the honest upright banks in those countries famed for their honesty.
    After recent events you cannot believe they would even consider this.
    Question, if the banks are ripping us off en masse, into what banks are they stashing their illegal cash ? It’s like a squirrel hiding his nuts in a neighbours dray.

  31. zorro
    June 29, 2012

    Mrs Merkel is finding out that what one perceives to be their greatest strength can also be their greatest weakness if partners know how to exploit it……The smiles told it all (Mrs Merkel’s was noticeably absent….)

    The latest can kicking solution seems to be as follows….

    No more German gauleiter/blockwart supervision on future bailouts….Greece will definitely play up around that one! What’s good enough for Italy/Spain should be good enough for Greece will be their argument.

    Money will go directly to Spanish banks without it seems counting towards the state’s national debt. ‘Healthy’ Euro countries (Germany?) will provide funds to the EFSF/ESM arrangement (though as John says, this will be through issue/covert QE measures in practice)….If this is the case, the pressure will be huge to restructure the Irish deal, and the Greeks will not let matters rest

    The claims provisions on the potential Spanish bailout money also appear to have been loosened. It will be interesting to see what effect that has. The fiscal stimulus agreed will be too little too late.

    The rather weak policing provision obtained by Mrs Merkel is the ‘single banking supervisor’ scheduled for January 2013, but falls short of what Germany would have wanted for the sums that she has effectively committed to the Euro bailout.

    I cannot see any option for them but to QE/print massively to cover the gap now. Germany has shown that she will back down to keep her ‘market’ intact.


    1. Lindsay McDougall
      July 3, 2012

      However, so far she hasn’t agreed to increase the EFSF/ESM level of funding, merely to change the distribution mechanism. That pressure will follow shortly; we don’t yet fully know the extent of the problems of Spanish, Italian and French banks (these countries do not have a culture of full disclosure). It is also said that the Irish banks still have debt problems. So far, bank bail outs have been the main focus. Fairly soon, the French will ask everybody else to help pay for their looming pension fund deficit.

      I take comfort in the fact that the German electorate will not allow Mrs Merkel to waste more of their money. Germany has sovereign debt problems of its own. It will reach the point where Germany CANNOT help out other countries. When we near that point, just watch yields on German bonds rise.

  32. matthu
    June 29, 2012

    Now David cameron is saying this:

    “Most people in Britain want a government that stands up and fights for them in Europe and gets the things we want in Europe, that changes some of the relationship we have in Europe. I’ve made some small steps towards that – we used to be part of the bailout schemes, I got us out and that has saved us real money.

    Now I am really confused. Because I am pretty sure when we were paying into the scheme we were being told that it was in our interest to do so, that our money was safe and that we would actually be earning interest on it.

    Now that we are no longer contributing to any bailout schemes (and how many believe that? we’re just not making direct payments …) we are being asked to believe that this is also in our interest and that we are now saving even more money.

    It would seem that the euro crisis is one big opportunity for us. Why didn’t anyone think of provoking one earlier?

    David Cameron must think the electorate are all muppets!

    1. Conrad Jones (Cheam)
      June 29, 2012

      David Cameron’s solution to the Financial Crisis was to get everyone to pay off their debts. He forgot (or did not realise) that Debt is our money system.
      No Debt = No Money = Great Depression.

      Over 97% of the Money Supply is Commercial Bank Money which is created when a Bank or Building Society Extends credit. The reduction in regulations on Credit Creation and the merger of Deposit Banks with Investment Banks created the greatest Housing Boom in History.

      Most Politicians still believe the reason for the increase in House Prices was becasue of growing Demand as a result of a lack of Housing Stock related to an ever increasing Population – which leads to the old “Too Much Immigration” argument. reduced constraints on immigration – thanks to Labour; certainly contributed, but thic alone does not explain the huge growth in Credit Expansion which flowed directly into the Housing Market.

      This can be traced back to the early Seventies when credit rules were relaxed after the World was taken off the Gold Standard. This would suggest that Housing Costs went up – not because of immigration; but because of the increased availability of credit, which fueled high Inflation due to increased amounts of Commercial Bank Money – i.e. More Debt.

      CDOs were used to package up all these Mortgages which were then sold to Investors all around the World. The Lenders then had no incentive to even care whether the Lenders could pay back the debt.

      The argument about why this is good – often pedalled by neo-classcial economists is “the greater availability of credit allows small businesses to get the desperately needed finances to start up and create new Jobs”. What has actually happened is that lending to small businesses has actually declined over the last forty to fifty years, so all this newly minted credit money has merely inflated non productive existing decaying assets – such as old Property.

      1. Conrad Jones (Cheam)
        June 29, 2012

        ” The Lenders then had no incentive to even care whether the Lenders could pay back the debt”

        Sorry, this is what I meant:

        ” The Lenders then had no incentive to even care whether the BORROWERS could pay back the debt”

      2. zorro
        June 30, 2012

        It is certainly one of the main factors, but there is no doubt that immigration has put pressure on prices and supply. Also the increase in employment opportunities and higher salaries for women has exerted a push on prices so that now it is very difficult to afford a mortgage on your own salary and would now need two salaries.


  33. Christopher Ekstrom
    June 29, 2012

    No they have not.

  34. Monty
    June 29, 2012

    Does this mean that the beleaguered PIIGS will be able to access low interest loans from this syndicate, to pay down their existing and future high interest sovereign debts? Where is the fund borrowing this money from? Presumably, the German taxpayer is effectively underwriting this exercise to a large extent. There has to be some new input from somewhere, that is being earmarked as collateral.

    It can’t just be a closed money-go-round loop. That would be the financial equivalent of being able to reach down, take hold of your socks, and lift yourself into the air.

    1. alan jutson
      June 30, 2012


      Love the socks example !

      Perhaps thats what they teach them in Brussels.

  35. Leslie Singleton
    June 29, 2012

    And what about the (to date forced) sovereign lending direct to for instance Ireland? Ireland had banks in spades that needed supporting but they had to obey the rules–rules wriiten in to the Treaties that to listen to our Government are sacrosanct.

  36. Conrad Jones (Cheam)
    June 29, 2012

    I’ve placed this link on John Redwood’s site before – but it illustrates a very good point:

    Nigel Farage gives the example of the Spanish 100 billion euro bailout fund. 20% of the 100 billion (Mr Farage says), has to come from Italy, and will receive 3% interest from the Spanish Banks, but Italy will now have to borrow money at 7%. Italy is also facing the Prospect of requiring a bailout itself.

    When a Country needs a Bailout – or like the UK; has excessive National debts in proportion to GDP, Austerity and Tax hikes are used which results in less employment and more people relying on the State or having to take dramatic cuts in their standard of living.

    1. zorro
      June 30, 2012

      The state having control over people’s income and living standards. These ex communists (some of them at least) must love it!


  37. NickW
    June 30, 2012

    The primary purpose of a summit is not to actually do anything, it is to craft an announcement which every leader is able to spin for their own electorate to their own advantage, (and that includes the leaders of the European Government).

    Even in our little country, it is almost impossible for the Government to convert intent into action; over the whole of Europe it would require a degree of cohesion and unity of purpose which simply isn’t there.

    The link below illustrates perfectly the respect and solidarity that Italy has for Germany and Frau Merkel. Even Countries which grudgingly acquiesce to proposed actions are perfectly capable of making absolutely sure that they will never ever be implemented.


    Summits produce speeches, and nothing else.

  38. The Prangwizard
    June 30, 2012

    It’s all ‘funny money’. What if faith in money collapses? Why hasn’t it? Does QE result in the printing of paper money or is it just figures on computers? Should we buy gold, or land, or tinned food? It’s as if debt no longer matters, I don’t see how the sums involved can be paid back in a thousand years, except in some enormous fiddling of the books. Of course that’s it, isn’t it?

  39. […] summit, refusing to agree to anything until the refinancing deal was pushed through. John Redwood argues this morning that the agreement that the leaders eventually reached is actually a form of Eurobonds ‘by the […]

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