Thursday, 21 June 2012

It's time to ban loans to €urozone countries

So, Greece has elected a pro-EU, pro-austerity, pro-bailout government again which will soon be implementing even more of the punishing EU-mandated austerity that led to riots earlier this year in return for increasing its crippling national debt. You can't make this stuff up.

Europhile politicians have declared the Greek result as a victory for "Europe" (they mean the EU but they don't acknowledge the existence of a Europe outside of the EU) and for the €uro.  What they refuse to accept, though, is that the result is irrelevant to the future of both the EU and the single currency.  The €uro will fail whether Greece is in it or not.  The Greece-shaped economic black hole in the €urozone is mere pocket money compared to France, Spain and Italy.

Spain is the fourth largest economy in the €urozone and they've just had to go cap in hand to the EU bailout fund to get their banks recapitalised.  The Spanish economy is in such a poor state that the yield on 10 year bonds (kind of like the interest rate on a loan) has tipped over 7% - that's the psychological barrier between moderate risk and high risk and Ireland, Portugal and Greece all crossed that line prior to collapse.  Cyprus, the €urozone country tipped to fall over next, is averaging almost 16% yields on 10 year bonds and has apparently been talking to the Russians about a loan to bail out one of its banks next week.

Spain is currently waiting for €100bn of capitalisation for its banks who have unexpectedly found that having entire towns of half-finished houses, toxic mortgages and billions of €uros of loans to bankrupt countries making up the bulk of their assets means that they might not be able to pay their bills which even more inexplicably seems to be putting institutional investors off the idea of loaning them even more money.  Spain is too big to be bailed out - there isn't enough money in the EU - which is why its banks are being bailed out directly by the EU bailout fund that is only supposed to be used to bail out countries.

Italian 10 year bonds are at just over 6% and we've yet to see the effects of Italian bank BNI freezing customer accounts for a month.  It's reasonable to assume we'll see a run on the bank when it unfreezes the accounts again and it's also reasonable to assume that as happened here with Northern Rock, a run on BNI could very well trigger the virtual collapse of the Italian banking system and force the Italian government to bail out its banks.  The big difference between a bailout of UK banks and a bailout of Italian banks is the cost - the British government is paying 4% interest on 10 year bonds, the Italian government is paying around 6%.  This might not sound like a big difference but it adds 50% onto the Italian government's cost of borrowing compared to the British government.  To put it into context, it cost £850bn to bail out RBS - with a 4% yield, that means the British government would have to pay back an extra £34bn on top of the £850bn in 10 years' time.  If the Italian government had borrowed £850bn at 6% they would be paying back £51bn on top of the £850bn - that's 3 times the GVA of Birmingham.

The €urozone is in terminal decline, UK banks need to call in their €urozone loans and the British government needs to ban any further high risk loans to €urozone countries to protect the economy from over-exposure to the €uro's imminent collapse.