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European Rescue Package May 2010 analysis / debate contribution

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.......the lunatix are on the grass..........................

the night it all started



There is so much ridiculously flimsy commentary on this momentous agreement and open market operations activity consequent in Brussels, early this morning. I personally could not sleep so I have been monitoring this; just about since the initial announcements from the Justus Lipsius buildinasymptotix fountain blogg here in BXL at 4am CET this morning.


It is a momentous process, the like of which we have really never seen before. There are two major points of comment to consider and these are as usual firstly on the process side and secondly on the institutional side.


The process is very complex involving an SPV (Special Purpose Vehicle) as the cradle for contingent funding should sovereign default of Eurozone member states occur (I will return to this in the institutional commentary).

But the key initial (immediate) objective which was to stabilize global asset markets by a "shock and awe" injection of liquidity via the secondary sovereign debt markets has been expedited but not only on that single front. We are seeing announcements from the Central Banks of a dollar swap operation involving the usual suspects (US Fed, Canada, Switzerland and the Bank of England) acting in concert to provide dollars to the European banking system. Why? Again all dollar deposits in Euro denominations have been repatriated and the ECB along with the general "Eurosysteme" is actually running out of Euros!

That's the only reason this kind of concerted action ever takes place. See my depiction particularly of the fourth quarter of 2007 to see the context into which such liquidity operations generally take place. Quantitative Easing is not the correct toolset when the emergency is trans-national, QE is a domestic "overfunding" approach by a single central bank on its domestic monetary system. This is a global issue.

Of course the asset markets have responded in the manner the politicians and bureaucrats intended, if you throw that amount of monetary base as a stimulant to asset markets, of course they are going to gyrate a little, don't we know they are essentially adolescent? But the principal downside risk of this kind of open market operation is that its consequences are indeterminate. By this I do not mean that we (I mean the general "we", not "asymptotix" of course) have not studied the consequence of this kind of quasi-state activity, we have but they happen so rarely that there is insufficient data to empirically support a determinate analysis of what the implication of a waterfall or hose pipe of liquidity causes in the (global) asset spectrum in the medium term.

What we do know is that quantity of liquidity has to be "absorbed" i.e. it will re-shuffle the asset spectrum, altering relative yields and thus will effectively settle somewhere by creating relative winners and losers in the asset portfolio globally. The problem is we don't know who the relative winners and losers are, to know that we need a model of who holds what and if any Central Banker or Politician (or trader) tells you they have a good understanding of that, you ask them when? Five seconds ago? Not a lot is written on this general topic since it only occurs in emergencies, my personal hackles are raised because we seem to be doing it as a regular thing right now! But without the proper institutional configuration to do it properly.


The institutional concern is highlighted since the "EU" (using that term very loosely, which I will explain) is now using a Special Purpose Vehicle (SPV) as the key institutional player in staving off the wolf pack of speculators. But is this not playing into the wolf pack's hands?

Indeed is it not the case that the necessity of the SPV is exactly the intellectual validity of the wolfpack's determination to short the EU and its key manifestation the Euro!? Why is such a dodgy legal concept, key to the Credit Crisis in facilitating off-balance sheet maneuvering, thought to be nailed by the new ethos of transparency; being phoenixed up again to support this European emergency response? (It is ironic that the SPV was designed to facilitate "bankruptcy remoteness").

The reason is that the "EU" is institutionally missing a lobe of its brain, a leg of its table or a bulb in the chandelier. The SPV facilitates the European Commission (which part, which section which scion, they only know; since the concept of DG's has gone flying out of the window) behaving in the role of European Debt Management Office. Control Freak bureaucrats, as I have said before, too lazy to get on with job of establishing a European sister institution to the ECB analogous to the Debt Management Offices of the individual member states; are using this SPV to exercise power (authority?) over European markets and States!

More to the point the Commission is far too power hungry to pass up the opportunity to grasp Euro debt management powers to itself, even if it has to use an SPV to do it. As you can tell this gets my goat! I am not trying to make myself popular! This is the WRONG way to go about it, it does not cover up the lack of institutional planning in Brussels, it's just wrong-headed and sloppy and in that it is naïve since you can't hide a fundamental structural gap.



It's also the flimsy journalistic comment which irritates me in all of this. The duty to inform is a load of tripe when the journalists have no clue and no framework to understand what is happening, how can they explain it to you and me?

The swap deals between the Central Banks are not necessarily symmetric indeed by definition there are asset implications from asymmetric leakage but the use of the SPV makes a mockery of standard Monetary Economic Institutional models.

The Commission Emperor has no clothes when viewed through the lens of someone trained in this topic. There is no excuse for this kind of activity from the people who run our lives. I don't care what the internecine power struggles are in Rond Pont Schuman! Get over it! I just think it is fundamental that politicians and bureaucrats all over Europe start to "do the right thing" now, not just in the UK and I am happy to go on the record to expose them when they are completely out of control.

Remember in this context the Central Banks are executive agencies of the state (however morphed) and the state in the case of the EU is the Commission, un-elected! I hope I am articulating what the more savvy of you are feeling in response to this announcement.

I am effectively laying out the logical steps as any undergraduate is doing at this time of year, no more, no less. Alistair Darling would rather have been anywhere else than Brussels overnight and George Osborne hasn't the least interest right now but I would argue that if Dutch and Swedish and Belgian colleagues are taking a close interest in this massive event then British people should too.




written by: J A Morrison

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