THE FINANCIAL -- There was an element of drama and surprise as the European leaders burnt
the midnight oil on Wednesday to deliver the ultimatum on Europe’s and
indeed the global financial future.
It was headlined across nations as
the Make-Or-Break Deal. There were cynical asides from the United
Kingdom, with leaders quietly gloating over the possibility of the euro
demise; Sarkozy of France had started a Dance Macabre at the last stages
of negotiations with Angela Merkel and clearly showed his differences
on the approach to the euro zone crisis. Angela Merkel showed her
nerves of steel and that particular German approach to doggedly holding
on to a hard and fast line: Euro zone must be delivered from the devil
or the global economy will fall into a bottomless pit.
At the end, after much hanging around and great deal of wrangling, we have a new financial baby, born in Brussels on the 26th of October 2011: It’s name is EFSF and it stands for European Financial Stability Fund. Its cost to still unknown group of money lenders is a whopping one trillion Euros. For those who may find the word of trillions incomprehensible, it is about coughing up 1000 million Euros into the empty vaults of major banks in Europe and having enough money to help those governments in need to balance their budgets - governments not in Africa - but right here in Europe.
The production of one trillion Euros seems a last ditch battle to save the Euro and the Euro zone ability to hold together as one currency unit and as one political entity. First the injection of large funds into near-bankrupt banks was talked about as Quantitative Easing, but this did not go well with the European psyche which saw the QE 1 and QE2 in the United States merely add to the misery of having more debts and more hunger for money. They then invented the phrase Credit Easing, which essentially meant helping the banks to lend more easily by providing more money to them. This phrase did not last beyond a mere week and now we have a new financial phenomenon in the sky which talks about the one trillion Euros being used to leverage greater mobility of funds, investments and economic recovery. I teach finance at MBA level and I use the analogy of a weak man using a pole to move a huge boulder stone with ease where the pole is used as a lever to push a heavy load. The EFSF is expected to do just that – to be used as a lever , in a leverage mode, to try and dig into the bottom of a massive debt boulder and move it slowly and steadily, only because all that we have now to move the mountains of debt is a small pole of a trillion Euros. This may vanish within weeks.
The EFSF has given the markets sudden hope and like a dormant snake snarling out of its cage, markets are spiralling upwards as I write this column and are catching up with lost sleep. The idea is that soon, all will be well, that there will be unity of minds among the European leaders and the American political juggernauts from the Republic and Democratic parties, that the Chinese, the Indians and the Brazilians will all sing hallelujah to the new deal and that the global economy will spring back to freedom from the debt-slavery of nations. I remain positive about human capacity to survive and invent ways and means of emerging from natural disasters, wars, and the ravages of financial turmoil. What still puzzles me is how the banks - which have been asked to write off 50% of Greek debt , develop debt-restructuring with other nations such as Italy, Portugal, Spain, Ireland and a myriad of other smaller nations and entities, and at the same time begin a new wave of lending to governments and business to make the economy rebound - will work with the small dosages of funds provided by EFSF from the one trillion Euro basket.
If Greece’s debt is to be forgiven by 50%, who indeed is paying this money?. Obviously, banks have been asked to forgive the 50% and absorb the losses, which are to be recapitalised by the EFSF, but the more complex issue is where does EFSF get the money from?. Not from the tax-payers directly, although there may be some hidden tax agenda to beef up national treasuries because tax-payer revolt, in addition to the siege on Wall Street by disgruntled commoners, will be more damaging than a recession; not from the European Central Bank because ECB would require printing of paper or electronic money or buy back large amount of distressed bonds from the rich nations gone poor. Where the funds for the EFSF will come from, other than from substantial contributions of Merkel’s Germany and reluctant France, still is a mystery to me.
The EFSF deal is highly complex and much of the information pertaining to the debt levels of governments, banks and the inherent capacity of stressed banks to survive beyond the little help they will get from EFSF’s leverage facility is still not readily available. What perhaps is the basic European strategy is to provide a mouth-to-mouth resuscitation to the banks gasping for breath, keep them alive, prop them up and let them walk. Even then, someone needs to feed the banks to survive and lend more money, or else, there needs to be another round of meetings in Brussels to increase the quantum of ESFS.
I see a new paradigm emerging. And it is very interesting to watch. The Chinese who have astutely worked hard, amassed a lot of wealth, built a massive reserve and loaned much of them to countries such as the United States were about to go belly-up with all the mountains of debts in other countries and the continuing devaluation of their reserves. In addition, their pursuit of wealth through massive development of African oil and mineral resources is being eroded through wars and liberation movements supported by the West. The Chinese may view the current European initiative as a not only a stabilising factor but may indeed physically support the European Financial Stability Fund with cash injection. This would have multiple advantages for China and indeed for the global community: one is that China will ultimately enter centre-stage of world economy and politics without being just a provider of goods and services; it will increase a greater East-West collaboration; and more importantly, may bring about a greater global economic sharing of wealth, technology and freedom.
One question still remains: EFSF is for European Banks only. Will there be an Asian Financial Stability Fund, an African Financial Stability Fund, an Arab Financial Stability Fund and an American Financial Stability Fund for the whole of the United States and Latin America? And where will these funds come from?
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