Twisting in the Wind

by Andrew Stuttaford

Germany’s Bundestag has now approved the latest absolutely definitive scheme to rescue the Eurozone. Rather than relying on the European Central Bank (the best of these sort of approaches), the chosen solution will be to leverage up the EFSF, the Eurozone’s bailout fund, a Rube Goldberg device to save a Rube Goldberg currency.

Take it away Ambrose Evans-Pritchard: 

Dr Merkel has won her vote. She secured an “own majority” [i.e. a majority that was not reliant on opposition votes] for proposals to leverage the €440bn bail-out fund (EFSF) into the stratosphere, with the support of some very sheepish looking law-makers from posturing Free Democrats and Bavaria’s Social Christians. But what a price she paid. The credibility of her team is shattered. Europe has all but destroyed her, even if she manages to limp on to the next crisis. As she glowered darkly, speaker after speaker from the Social Democrats (SPD), the Greens, and Die Linke, asked how she could possibly reconcile her plan to leverage the EFSF to €1 trillion or €1.5 trillion (we still don’t know how much) with solemn pledges to the Bundestag just three weeks ago that there would be no such leverage.

“Shameless abuse of the truth,” was the verdict of SPD leader Frank-Walter Steinmeier. The government had acted “tactically” at every turn, “misled the people”, “held back information”, “crossed every red line”, brought Europe “to its knees” with botched policies, and lied blatantly about EFSF leverage.

“You came here to say there would be no leverage, not three years ago, not three months ago, but three weeks ago. You denied everything…This is a matter of democracy in our country. Trust is the resource with which we all work.” (For those German speakers who watched the debate, excuse my instant and loose translation, but I think it is not far off.)

Die Linke (Left) leader Gregor Gysi was electrifying. “It is the arrogance of power,” he began [which is pretty rich, coming from a “former” commie, but we’ll let that pass for now], and never let go.

“Every week you come up with a different story about this crisis…We were told there would be no leverage and you have reversed everything in a matter of weeks. Now we learn that the 20pc loss will fall entirely on taxpayers. They alone will pay. That is the decision you are taking…”Why don’t you tell German taxpayers the truth? They are being asked to pay the losses for French banks.”

Green leader Jürgen Trittin rebuked Dr Merkel for hiding the true implications of EFSF leverage, particularly the plan to insure the first 20pc of losses on Club Med bonds.

“Why are you shying away from telling the people the truth? You must tell people what this leverage means. You must explain to them what the risk is, and why it is necessary. But you wriggled out of it….You came here three weeks ago and said there would be no leverage. This is the sort of thing that unnerves people.”

And so it went on, raw red-blooded democracy.

The unpleasant truth is that the EFSF leverage proposals are idiotic, the worst sort of financial engineering, legerdemain, and trickery. 

Pure Merkel, in other words. The farce continues. 

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