ARmy Rumour SErvice

Originally Posted by Wordsmith

Why would 'Euro South' need subsidising? If you have two Euro blocks, the mechanisms of exchange rates start to address the competitiveness issues. I would image that if 'Euro South' devalued by 30% relative to 'Euro North', Euro South would start exporting again and imports from 'Euro North' would be choked off. The structural imbalances which lie at the heart of the euro's problems would be addressed.

The bigger problem you have is that Club Med's economies have recovered at the expense of Germany's. So Italy, Spain, etc, start to show improved financial performance, while Germany's comes to a grinding halt.

Wordsmith

You may be right but only if you assume effective convergence between the economies of the two blocks. If not, the dynamics remain the same, you simply lose the contrast between Greece and Germany and the difference becomes, say, France/Germany or France/Greece - still significant enough to cause problems but over a longer timescale. It's also impossible to argue the case for a single Europe with two separate currencies plus countries like the UK who remain outwith.

I can't think of a currency union or empire (and that is the historically normative system not the nation state) for that matter where economic convergence was key. Look at the UK, Ireland was at best roughly a third poorer than England, actually not much better off then Greece but its middle classes benefitted hugely from the imperial project and it provided cheap man power. The South of Ireland broke off after more than a century and became even poorer for about fifty years.

Actually what's historically normal is stubborn divergence with a dominant capital rich and often extractive power center stimulating economic activity largely for its own benefit with more peripheral states rising and falling as areas of opportunity. You could see that as the Yankee North East in the US, the South East of England in the UK, greater Zurich in the Swiss federation or even greater Dublin in the pre-Euro RoI and these have only achieved greater degrees of equality than they originally had because of the late adoption of distributive welfare systems. The EU with its rich conservative core and rascally periphery looks if anything far more convergent than other examples.

What's wrongheaded here is the idea that the whole thing needs to suddenly mimic Germany, a stolid but often troubled economy embedded in its own culture that evolved to where it is over half a century. That's not the root of most of the problems but rather the internationalized banking system the european part of which was a disaster waiting to happen even before Lehman.

Here's an interesting article in the Guardian. If only half of it is true, the Spanish banks are in deep, deep shit. (My bold)

Spain's savings banks' culture of greed, cronyism and political meddling | World news | The Guardian

Spain's savings banks' culture of greed, cronyism and political meddling

As European taxpayers prepare to rescue Spain's ailing banks, anti-corruption prosecutors, academics and regional parliaments are uncovering a tale of greed, cronyism and political meddling that has brought many of the country's leading savings institutions to their knees.

With the fourth biggest lender, Bankia, demanding €19bn (£15.4bn) and authorities now admitting a further €9bn is needed by two former savings banks – CatalunyaCaixa and Novagalicia – concern is focusing on both the mushrooming bill and the way banks have been run. Court investigators are also scrutinising payments to former senior executives and the part-flotation of Bankia, in which 350,000 small investors saw two-thirds of their money wiped out.

The bill that Europe's rescue funds must pay has been increased by the multi–million euro payoffs taken by some senior executives shortly before their banks collapsed and decisions taken by unqualified board members who admit they were incapable of analysing the banks' books. Boards were stuffed with political placements or people who had little idea about banking – including, in one case, a supermarket checkout worker...

A committee in the Valencia regional parliament is looking into how the Caja de Ahorros del Mediterraneo (CAM) – described by the Bank of Spain as "the worst of the worst" – collapsed last July.

"Did I check through the accounts?" asked José Enrique Garrigós, a small businessman who was a CAM board member. "Look, I'm an average businessman, I don't have the time or the training to do that." He said that other board members at the savings bank, based in Alicante, eastern Spain, included a checkout worker and a sociologist. A dance teacher, an artist and a university psychologist were also reportedly on the board.

"The things we have been hearing are surreal," said Mireia Mollà, a regional MP for the leftwing Compromis party. "We still don't know what payments senior management took with them when they abandoned the ship."

Some board members have suggested that minutes of meetings may have been tampered with. They question, for example, whether they were ever really consulted on key matters such as executive pay or warnings from the Bank of Spain that the caja was in dire straits. "I didn't see the official minutes as the law requires," said Jesús Navarro, another board member. "Except on a computer screen."

Analysing the accounts would have required her to be a superwoman, complained one CAM board member. "I didn't have sufficient financial, legal or accountancy skill… board members were not legally required to have any sort of qualifications or experience," agreed fellow board member Juan Pacheco.

This left control of CAM in the hands of chairman Modesto Crespo, director general Roberto López Abad and a few senior executives, they said, with the board effectively rubberstamping their decisions. "There was barely any debate and votes were … unanimous," said Pacheco.

"One board meeting a year was held abroad," said Navarro. "I refused to go on principle." But he admitted attending a meeting hundreds of miles away in San Sebastian with some 50 other people: "Obviously I went with my wife, and the rest of the board took their partners too."

Over six years, board members and senior executives – or their families – received €161m in loans, often at soft interest rates, according the Workers Commissions trade union. Senior executives doubled their salaries over the same period.

If this is true, the supervisory boards of the banks were largely - if not totally - lacking in the skills and knowledge to run a large financial organisation. In which case, I expect the senior management of the various caja's has spent the last 3 - 4 years running around, trying to stop cracks appearing in their finances and trying to stop corrupt decisions seeing the light of day.

Spain has been publicly talking about 40 billion euro's being required. Financial analysts have been in the range 200 - 400 billion euros. Somehow, I think the financial analysts are going to be closer to the mark.

I think we're going to see a slow motion car crash in Spain with the banks requiring a huge bailout. The banks will then shrink their lending as they try to get back to some measure of financial stability. The reduced loans available will hit Spanish economic activity, in turn worsening the government's deficit. Phase 2 of the bailout will then require the Spanish government being bailed out 6 - 12 months from now.

The other effect will be contagion seeping into Italy and developing economic problems in that economy. And if Italy gets into trouble alongside Spain that will be game over for the euro (and a fcuking great dent in the UK's economy).

Wordsmith

Originally Posted by alib

I can't think of a currency union or empire (and that is the historically normative system not the nation state) for that matter where economic convergence was key. Look at the UK, Ireland was at best roughly a third poorer than England, actually not much better off then Greece but its middle classes benefitted hugely from the imperial project and it provided cheap man power. The South of Ireland broke off after more than a century and became even poorer for about fifty years.

Actually what's historically normal is stubborn divergence with a dominant capital rich and often extractive power center stimulating economic activity largely for its own benefit with more peripheral states rising and falling as areas of opportunity. You could see that as the Yankee North East in the US, the South East of England in the UK, greater Zurich in the Swiss federation or even greater Dublin in the pre-Euro RoI and these have only achieved greater degrees of equality than they originally had because of the late adoption of distributive welfare systems. The EU with its rich conservative core and rascally periphery looks if anything far more convergent than other examples.

What's wrongheaded here is the idea that the whole thing needs to suddenly mimic Germany, a stolid but often troubled economy embedded in its own culture that evolved to where it is over half a century. That's not the root of most of the problems but rather the internationalized banking system the european part of which was a disaster waiting to happen even before Lehman.

But that's because the currency has been imposed on the weaker states by the stronger state, hence 'empire'. In that set-up the weaker states misbehave financially they are either compelled to conform or rebel and secede - hence the German insistence on an effective mechanism for compulsion and the Greek flirtation with secession. No-one's tried to introduce a currency like the Euro on a voluntary basis before, thus the need for convergence.

Originally Posted by FORMER_FYRDMAN

But that's because the currency has been imposed on the weaker states by the stronger state, hence 'empire'. In that set-up the weaker states misbehave financially they are either compelled to conform or rebel and secede - hence the German insistence on an effective mechanism for compulsion and the Greek flirtation with secession. No-one's tried to introduce a currency like the Euro on a voluntary basis before, thus the need for convergence.

No you are missing the point, diversity provides opportunity for capital in both weak and strong states, even the USSR maintained natural regional imbalances and its a permanent feature of both the USA and UK.. Convergence is antithetical to capitalism, it thrives on imbalances. Whether this serves the broader population is a different question but they are not awfully bright and easily distracted by fairy tales of feckless foreigners

The PIIGS have expressed near zero interest in economically suicidal secession.

The German banks have already sent their capital abroad, just rather stupidly as the poor hicks actually thought that the Euro instantly converted Athens into Dusseldorf. Now it's more a matter of coming to terms with reality.

Surprise, surprise...

Debt crisis: Spain bows to €100bn bank bailout - Telegraph

Spain paved the way for a €100bn (£81bn) bail-out of its stricken banking sector on Saturday night as European leaders moved to bring a halt to the continued economic malaise hurting the eurozone.

The troubled country – the fourth-largest economy in the eurozone – said it would ask for a capital injection once the full extent of its banking problems were known.

In an early-evening speech in Madrid, finance minister Luis de Guindos said it would request assistance “for those banks that need it”.

He denied that it was a rescue of the Spanish economy as a whole, but rather “financial support” for the banks concerned.

Mr De Guindos said the amount eventually requested would depend on the capital required by banks, plus a “significant margin”. Euro area finance ministers confirmed that the amount could be up to €100bn.

Here's the interesting bit.

The Spanish government has hired consultants Oliver Wyman and Roland Berger to undertake audits of the entire banking system’s capital requirements. Their reports are due by the end of June. In addition, another series of audits – to be conducted by accountants KPMG, PwC, Ernst & Young and Deloitte – will look at each of the major banks in turn. Only once the reports are complete will the formal request be made.

If you read that paragraph in conjunction with my earlier post referencing the Guardian article about corruption in Spanish banks and the fact that analysts are suggesting the hole in the Spanish banks accounts is of the order of €200bn - €400bn, I suspect the size of the rescue will be going up when the reports are in - not least because none of these accountancy firms are going to risk understating the size of the problem; if anything they'll overstate it to protect themselves.

I also suspect Spain itself (and not just its banking system) is heading for a bailout.

Wordsmith

to be conducted by accountants KPMG, PwC, Ernst & Young and Deloitte

Hmm...

Originally Posted by Pyianno

Hmm...

I am aware of the irony of using companies that missed fcuk ups like Enron, Worldcom, etc - not to mention problems with banks like RBS in the run up to Lehman. And yes, the big four accounting companies need a big shake up so they're less in the pockets of their corporate clients.

However, they're all we've got in the short term. And in this case, if they understate the potential losses, they're going to be in deep shit from both governments and from class actions. For the moment at least, I think they'll find many of the skeletons in the closet.

I suspect a bigger problem might be the Spanish government wanting a voice in drafting the report. They've got more incentive than the auditors to keep some of the losses hidden. The Spanish government isn't going to like it if the auditors come up with a figure like €250bn.

Wordsmith