09:55 – Wow. The EU crisis meeting this weekend degenerated even faster than I expected, with Merkel and Sarkozy literally screaming at each other, so loudly that it was audible over Ode to Joy down the hall in the main conference area. The problem, stated simply, is that Merkel and Sarkozy hate each others guts. Were it not for the critical nature of these meetings, they wouldn’t agree even to be in the same room. Sarkozy wants Germany, directly and indirectly, to pay essentially all of the costs of “rescuing” the euro. Merkel knows that Germany couldn’t afford to do that even if it wanted to, which it doesn’t.
The only significant thing to come out of the conference so far is a preliminary agreement to recapitalize EU banks to the tune of about $135 billion. That’s half of what the IMF said would be necessary, and even the IMF figure is based on rosy assumptions. And, if the last few months is any guide, rosy assumptions are highly unrealistic. My own opinion is that $1 trillion would be just a start on what’s needed.
Meanwhile, we’re in the middle of a huge run on EU banks. Individuals and corporations are withdrawing funds from all EU banks and moving them to perceived safety, often literally under their mattresses. No one–individuals, corporations, or governments–trusts EU banks any longer, and with good reason.
The level of writedowns that banks will be obligated to accept on Greek debt is a huge sticking point. The IMF and Germany are pushing for 50% to 60%, which is itself grossly insufficient. France, whose banks are hugely exposed to Greek debt, is insisting on no more than 35% to 40%. The bankers themselves, via the IIF, are saying that if the 21% “haircut” agreed at the 21 July summit must be increased it can be to no more than 25% to 30%. It’s gotten so bad that the EU authorities are now playing chicken, telling the bankers that if they don’t cooperate the EU is now willing to allow Greece to go into hard default, which means 100% haircuts.
There was never any realistic possibility that this summit would agree to any actions that had any chance of “solving” the crisis, but now it’s clear that nothing of any significance whatsoever can be agreed. It’s now as close to mathematically certain as politics can ever be that the euro will break up catastrophically, and it will be sooner rather than later. I’d bet good money that Germany is preparing, if not already fully prepared, to depart the euro and re-institute the D-mark under whatever name. Finland, Austria, and the Netherlands are probably planning to do the same, either with individual local currencies or as a part of a Northern-tier currency union.
What we’re watching is not just the collapse of the euro or even the breakup of the EU, but the destruction of the whole European welfare state.