Sunday, November 20, 2011

Democracy Isn't Dead Yet

“Canned laughter” is frequently used on TV shows to create the illusion of soothing, comedic value in the minds of the show’s viewers. Anyone who has watched a show with “canned laughter” is familiar with the logic. One of the characters says something or another that isn’t very interesting or funny, the laugh-track comes on and then we find ourselves forcing a smile or snicker as an almost “unconscious” reaction. Almost, but not quite, because many times we are still forced to face our participation in this contrived reality after the fact.

The ongoing shows in the realm of the political economy are no different. They use their own versions of “canned laughter” to legitimatize a situation which is otherwise plainly illegitimate to those of us strapped into our seats, forced to watch along in agony. A great example of these political laugh-tracks is the “vote of no confidence” that is frequently held in Parliamentary countries, where the appointed governments almost always survive in one piece by maintaining “party discipline” or slightly modifying policies to corral dissenters in.

However, attempts to impose an artificial feeling of political satisfaction for the people and political legitimacy for the government cannot and will not be successful forever, under any and all circumstances, and that fact couldn't be any truer than it is now. It is evident from the “no confidence vote” that has just occurred in Greece, where Prime Minister George Panadreou was truly on the chopping block this time, and the one that will soon occur in Italy, where Prime Minister Silvio Berlusconi will be as well.

With regards to the former, G-Pap managed to survive with a slight majority of 153 votes (2 votes more than necessary), and is now claiming to be in talks with other parties about forming a “national unity government”, which he almost assuredly will not be the leader of. At first blush, one could be forgiven for seeing the developments of last week in Greece, culminating in this vote of confidence for a future government coalition, as marking an unmistakable death blow to “democracy” in the developed world.

G-Pap dangled the prospect of a truly democratic process in front of the Greek people as a ploy, to scare the opposition parties into throwing their support behind the oppressive EU deal of October 26 and joining a coalition government, after which both the referendum and the protection offered by “opposition” parties would be callously stripped away from the people. Indeed, a better example of blatantly anti-democratic tactics within a democracy cannot be found short of fiscal “supercommittees” and military coups.

G-Pap’s government has now managed to stay in power, albeit in a different form, gain stronger commitments from opposition parties to the EU bailout/austerity deal and postpone elections until after the deal passes and €8 billion from the IMF is disbursed to avoid “default”. Merkel and Sarkozy will now sleep better knowing that the Greek people will be forced to play their part as victims in an epic criminal exortion scheme, without any inconvenient democratic processes, such as a referendum, interfering along the way. Or will they?

Sometimes, when we get bogged down in the superficial details, we miss the bigger perspective that is evolving. G-Pap did win his confidence motion, but only by a slight majority of two votes, and it cost him his job. More importantly, it is not clear what kind of credible “coalition” government can be formed or whether it can really quell political dissent against the austerity deal. Now comes the part where ruling politicians must actually convince the various political factions that G-Pap's words to them in Parliament about “national unity” and “personal sacrifice” are more than just words. Deutsche Welle Reports:

Papandreou Wins Confidence Vote But Looks Set to Step Down

” It is a first in the constitutional history of Greece; parliament expressing its confidence in the prime minister so that he can soon resign.

… If the conservatives continue with their refusal to take part in any government of national unity, it would leave the Socialists with no choice but to form a shrunken coalition with the populist right and the economically liberal "Democratic Alliance" of former Foreign Minister Dora Bakoyannis – seen as a rather pointless exercise.

The leftist opposition signaled that it was particularly upset about the vote. "They want us to express our support for a government that is not even there anymore," said leader of the moderate Left Alliance Alexis Tsipras – with many commentators agreeing that there's an element of truth in Tsipras' assessment of the situation. “

CNN adds some more “clarity” to the ruling politicians' ambitious political plans for Greece (but against the people of Greece), and the ongoing negotiations with New Democracy opposition leader Samaras, who has so far refused to play his part in this Greek tragicomedy by demanding both G-pap's resignation and also snap elections for a new government within six weeks. Now it seems G-Pap has agreed to resign if a coalition government is formed, but Samaras refuses to be a part of any coalition until the resignation is put in writing, notarized and delivered to his doorstep, and only then will he be willing to discuss additional terms (i.e. when to hold elections).

Greek PM Expected to Resign After Coalition Government Formed

Sunday's Cabinet meeting will be the last with Papandreou as prime minister, the spokesman said, according to media reports. The meeting will focus on issues relating to Monday's Euro group meeting, at which Finance Minister Evangelos Venizelos will represent Greece, the reports quoted the spokesman as saying.

Venizelos is likely to remain in his post as finance minister in a new government, sources told Greek television. Candidates for the prime minister's job include Petros Moliviatis and Loukas Papaimos, according to Greek television. The new government will have a life of four months, according to Greek television, citing sources, and elections will be held in early spring.

...Speaking briefly to reporters after the meeting, Samaras said that once Papandreou resigns, everything will "take its course" and "everything else is negotiable."

...But many questions remain unanswered. The main opposition party has showed little willingness to join the unity government, with Samaras making it clear he did not want to be part of a coalition.

In forming the new government, the PASOK party will likely seek the support of smaller parties. Samaras has called for a transitional government for six weeks, followed by elections."

The only clear result we can expect from all of this political haggling is that the Greek people will not take kindly to such a blatant betrayal of what little trust they had left to offer to their government. So underneath the surface of G-Pap’s despicably cruel, yet “successful” ploy against the representative interests of the Greek people, we see that there lays a sociopolitical situation that is as volatile and uncertain as it ever was. The Greek people, the opposition leaders and, really, the rest of the world were presented with the PASOK government’s “canned laughter” routine, and very few of us felt the need to smile or laugh along.

In a decades-long era where democracy has been severely lacking and dysfunctional at best, and entirely non-existent at worst, it seems that what has happened in Greece over the last week was net beneficial for the concept of representative democracy within a nation-state. The ruthless political brinkmanship of the Greek Prime Minister was laid bare on the table in full view for the world to see, and, more importantly, for the Greek and German people and their few remaining "representatives" to digest. It has left both him and his anti-democratic government with no credibility. Bloomberg reports:

Papandreou Seeks Unity Government

"The Communist Party of Greece, the third-largest party with 21 seats, and Syriza, which has nine, [in addition to Samaras' New Democracy Party], rejected the overture from Papandreou, and called for elections. “I won’t bow to blackmail,” Communist Party leader Aleka Papariga said.

The government will need the backing of 180 lawmakers to secure approval for Greece’s second aid package that was negotiated in Brussels last month. Disbursement of funds was halted after Papandreou’s call for a referendum was opposed by German Chancellor Angela Merkel and French President Nicolas Sarkozy.

“In the eyes of Angela Merkel and Nicolas Sarkozy he doesn’t have much credibility left,” Jacob Kirkegaard, research fellow at the Peterson Institute for International Economics, said in a Bloomberg TV interview. “Greece needs to have a new face to the rest of the world.”

We must also remember that the democratic ideal may have began in Greece, but now encompasses much of the world and especially the West, so it cannot be expunged from our collective consciousness quite so easily. It has taken many, many hits over the years, nearly becoming a heap of garbage in the dumpster of history in 2008-09, but it refuses to go gently into that good night. It’s resolve will next be tested in another critical (and much larger) member state of the Eurozone, Italy, and this time the odds that it comes out of the battle on top are that much better.

It has become quite clear that Berlusconi will not survive as the leader of Italy much longer, as many of his party members are refusing to support him. The financial “contagion” from Greece has rapidly enveloped one of the largest economies in Europe, as Italy’s sovereign bond yields have consistently hit record highs, and its ruling government simply does not know how to respond. Brussels wants it to effectively relinquish full fiscal sovereignty in a gambit to calm markets, but that is appropriately an untenable outcome for Italy, and Berlusconi is hoping the EU/ECB will offer to perpetually buy its debt until some political consensus is reached, which is also justifiably untenable for the rest of Europe.

The prospect for that political consensus is also drifting further and further out into the Mediterranean, as all of Europe "re-enters" a severe recession and credit markets weaken further. Given the way things have played out in Greece, anyone with the least bit of common sense knows that systematic austerity will not improve Italy’s rate of economic growth or debt-to-GDP levels, but only make them worse, and therefore further destroy its ability to remain solvent. Der Spiegel reports on how Italian politics is rapidly transforming to reflect the dire state of Italian finances.

Italy Becomes Next Euro Battleground

”It was a telling tidbit of news. This week, the French bank BNP Paribas announced that it had slashed its holdings of euro-zone government bonds, including €2.62 billion worth of Greek debt.

But it wasn't just bonds from Athens that the bank dumped. BNP Paribas also indicated that it had drastically reduced its holdings of Italian debt. In the three months prior to the end of October, the bank sold off €8.3 billion worth of bonds issued by Rome, reducing its exposure by 40 percent.

…Yet even as the turmoil in Athens dominated headlines this week, there were increasingly distressing indications that Rome may also be in trouble. For one, Italian borrowing costs soared earlier this week, with interest rates on sovereign bonds rising to 6.4 percent, perilously close to the mark which triggered emergency Italian bond purchases by the European Central Bank in August. Analysts consider a rate of 7 percent to be the level at which investors stop buying sovereign bonds.

Equally concerning are indications that the Berlusconi government may be close to collapsing. Several former Berlusconi loyalists published an open letter in the Italian daily Corriere della Sera on Thursday calling for a change at the top. One of the parliamentarians indicated that a rebellion could be mounted as early as next week, during a budgetary vote on Tuesday.

Reuters reported on Thursday that Berlusconi told European leaders in Cannes that he would call a confidence vote within two weeks. The Italian prime minister has survived 53 votes of confidence since 2008, the last of which took place on Oct. 14.”

Before any of the dust has even settled on the political machinations out of Greece, we can expect a whole new level of political turmoil in Italy, where Berlusconi cannot put together a “credible” austerity package and is losing the confidence of EU institutions, the Italian people, the opposition parties and much of his own party at a faster pace each and every day. And, once again, there is no separating the devolving European politics from the deteriorating European finances anymore, as is clearly illustrated by Italian Finance Minister Tremonti’s following statement to Berlusconi (translation from Italian news).

LINKIESTA: Tremonti to Silvio: Go Away or Monday Market is Bloodbath

Tremonti: “I am saying that on Monday there will be a disaster on the markets if you, Silvio, stay at your post and do not go. Because the problem for Europe and the markets, correct or not as it may be, is in fact you.”

In the evening, the Treasury has denied that Tremonti has said this sentence.

However, the chronicler of Linkiesta, along with a colleague from a major newspaper Anglo-Saxon, have personally heard the minister's statement that was later confirmed by government sources.”

So, despite the government’s best post-hoc denial, it appears that Berlusconi’s own finance minister has singled him out as not only being a political thorn in Europe’s side, but also a man capable of producing complete financial chaos on the Continent and around the world come market open on Monday. Now if that’s not something to laugh about, then I don’t know what is. A man whose biggest problem a few short months ago was a plethora of sex scandals is now being accused of potentially collapsing the entire EMU by his mere presence in Rome, and by his own man!

Even the Financial Times has stepped up to voice its opinion that Berlusconi has to go, in their lead editorial published on Saturday.

In God’s Name, Go!

“In a Group of 20 summit that fell well short of what was needed, the world’s most powerful leaders were powerless in the face of the manoeuvres by two European premiers: George Papandreou and Silvio Berlusconi.

The similarities between the two prime ministers are striking: both men rely on a thin and shrinking parliamentary majority and they are both squabbling with their own ministers of finance. Most importantly, they both have a dangerous tendency to renege on their promises at a time when markets worry about their countries’ public finances.

There is, however, one important difference: having reached €1,900bn, Italy’s public debt is so high that its potential to destabilise the world economy is way above that of Athens.

...After two decades of ineffective showmanship, the only words to say to Mr Berlusconi echo those once used by Oliver Cromwell.

In the name of God, Italy and Europe, go!"

The media critics and those within Berlusconi’s party, of course, believe he has to go because he is too weak when dealing with political opposition and unable to push through the savage austerity measures that the “Troika” (European Commission, ECB and IMF) requires of him. They are dead wrong. The truth is that there is no one on Earth "strong" enough to push such devastating and exploitative measures through, and Berlusconi is just a caricature of what happens when you make the foolish decision to be "that guy". Eventually, that guy is always swept away by the financial torrents that flow beneath.

Men like Berlusconi have only survived this long because institutions like the ECB have been willing to subsidize private and public finances through monetary policy, and namely asset purchases. That particular dose of canned laughter, however, is itself being exposed for what it truly is after a few years of diminishing returns and sociopolitical outrage. That's why ECB governing council member, Yves Mersch, told an Italian newspaper that his institution will not continue to defend the line in the sand for Italian bond yields and spreads indefinitely (a line dangerously close to being crossed after last week's action).

Reuters: ECB Debates Ending Italy Bond Buys if Reforms Don't Come

"Asked if this meant the ECB would stop buying Italy's bonds if it did not adopt reforms it has promised to the European Union, Mersch, who heads Luxembourg's central bank, replied:

"If the ECB board reaches the conclusion that the conditions that led it to take a decision no longer exist, it is free to change that decision at any moment. We discuss this all the time."

Since the ECB resumed its bond buying programme (SMP) around three months ago it has purchased some 100 billion euros of government bonds, a majority of which are thought to be Italian BTPs. Mersch said the ECB did not want to become a lender of last resort to help the euro zone solve its debt crisis and said it was concerned that its job could be made more difficult by governments that "don't meet their responsibilities."

Once again, neither Berlusconi nor anyone else can ever meet the "responsibilities" asked of them by the other Euro-crats. Some are foolishly more willing than others, but all fall short. Berlusconi "has to go" for the simple reason that he, like his obsolete colleague in Athens, refuses to represent the Italian people in any meaningful way or give them a voice to be heard throughout Europe, as representatives of their own best interest. It is because he has held 53 "canned" motions of no confidence in the last three years and each one of them was a bigger joke than the last.

And it gets even funnier. It is clear that the ruling politicians in both Greece and Italy are both scrambling to provide some "resolution" to their chaotic political atmosphere before Mr. Market opens on Monday, and that tells us almost all we really need to know. Every weekend has become a chance to smooth out the increasingly unprecedented volatility of the week that preceded it. To stifle the democratic processes of the economy, if you will. To prevent investors from voting with their accounts, and to prevent that from feeding back into actual political change.

Every weekend this happens, and every weekend the people who have to actually live in this world find the whole process less and less funny. All of these people aren't taking to streets to protest individual leaders, either. Many of them are protesting the entire Hollywood show, with all of the rigging and cheating and stealing and killing that goes with it. Some of us still wait in anticipation for the twists and turns, yes, but perhaps that is because we realize there is no longer only one way it could all play out. Bloomberg reports:

Thousands Rally in Rome, Pressing Italy’s Berlusconi to Resign Amid Crisis

"Tens of thousands of Italians gathered in Rome to call on Prime Minister Silvio Berlusconi to resign, as defections eroded his parliamentary majority at a time when the country’s borrowing costs are at a euro-era high.

Hundreds of buses and 14 special trains brought thousands of supporters of the opposition Democratic Party to the rally in front of the Basilica of St. John Lateran to hear calls for the premier to go. Demonstrators shouted “Shame”” and “Get Out” in the square that’s home to the first church built in Rome.

The premier, who generally spends his weekends at his home in Milan, remained in Rome in consultation with his top advisers after several lawmakers said they planned to abandon his People of Liberty party, threatening to leave him without a majority in Parliament before a key vote. Calls will increase for Berlusconi to resign if he loses the ballot to rubberstamp the 2010 budget report, likely to be held on Nov. 8."

Rest assured the next vote of no confidence, rumored to be held within 2 weeks (if the government even makes it that far), will not produce the automated response desired by Berlusconi. It may not produce the response desired by the rest of his party either, or the EU/ECB/IMF, or even the opposition parties. That’s the point, right? Democracy isn’t about getting exactly what you want or promoting economic growth or establishing “solidarity” in Europe. It is about one thing and one thing only, and that is giving a voice to the people so their opinions on these policy matters can be incorporated into action.

Whether those policies are trivial or absolutely critical to European stability is irrelevant at this time, like it or not. For now, it is clear that the European people are increasingly opposed to the tired old measures of the last two years, where people are squeezed from their jobs, benefits and homes just to keep the zombie banks alive for one more day, while economies across the world crumble. Some may ask whether the Greeks, for example, even know what they are protesting against, and what will happen as a consequence. UBS' Stephen Duo would probably answer "no", as The Guardian relays.

Eurozone Crisis: How Grim Would Bankruptcy be For Greece?

"There is no script to follow when a country goes bust, but as Greece stares into the abyss that would open up if it left the euro, the gravity of the situation has prompted UBS's Stephane Deo to quote Keynes: "Lenin was certainly right. There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency."

Deo added: "If a country has gone to the extreme of reversing the introduction of the euro, it is at least plausible that centrifugal forces will seek to break the country apart... monetary union break-ups are nearly always accompanied by extremes of civil disorder or civil war."

...Financial markets have already priced Greek government debt as worth less than 50c for each euro. But it's not the same for companies and individuals. If a Greek shipping company's debts are denominated in euros, the debts don't disappear, they just become dramatically more expensive to service.

NIESR can envisage that a Greek default would see the banks shut for weeks, even months. During a default, lending comes to a halt and corporate life seizes up. Unemployment and poverty soar; in Argentina's case, the jobless rate came close to 25%. By 2003, the numbers in "extreme poverty" reached 26% of the population, with more than 50% deemed below the poverty line.

One long-lasting impact of Argentina's bankruptcy has been the rise of worker co-operatives: they took over failed businesses and remain a feature of the country's economy. Local assemblies, which helped distribute food and organise health care, also sprang into being.

The flight of capital that precedes a default can also swiftly reverse. Once assets in Argentina became 80% cheaper than before the default, foreign buyers returned in force. Ireland, even though it has not defaulted, is seeing something akin to that today. Argentina has bounced back from the horrors of December 2001 faster than anyone predicted."

Although Duo (or The Guardian) isn't exactly the most unbiased observer in this whole discussion, he is correct to point out that Greece's economy and society will be dramatically effected by the aftermath of a default and devaluation. Business will not go back to usual anytime soon, and the "existing basis of society" will be overturned. The same is true for Italy, although Italians may have a much easier time of it given the size of their economy and export sector. It is certainly difficult to predict the exact developments that will unfold for the residents of these countries, and what dynamic will come to exist within its borders and between its international neighbors/partners. No one can ignore the fact, though, that whatever happens will be very painful.

Why, then, do the Greek and Italian people still show up in the streets just about every day to express their disdain for the current path of never-ending bailouts and austerity? It's not a simple question, but here's a simple answer - they believe only chaos is certain from this path. They look around and see that "austerity" is not reducing their country's debt burden, increasing its economic growth or promoting stability and peace among its people. For Greece, the bailout money goes in one public bank account, and out the privatized other, and for Italy, there isn't even any bailout money. In fact, there never will be, and everyone knows it.

We can repeatedly tell those people above, from a distance, how little they know about economic and financial history, or the extreme outcomes that have resulted from monetary hyperinflation, but I suspect we wouldn't really be telling them anything they didn't already know in the backs of their minds. It takes courage to understand the inevitable socioeconomic pain that will result from any political outcome,  but still assemble with others, stand out there and express yourself. We should not doubt for a second that these people are informed and are simply doing what they believe is best, materially or spiritually, for themselves, their families, their communities and their country.

It is also clear that some level of transmission from these people to their representatives in Parliament, however slight, still exists. By and large it has been through interviews, protests, riots and strikes that the peoples’ voices have been heard, but the possibility of meaningful elections still looms around every dark corner in Europe. Down every dark alley, there is a Parliamentarian that simply won't play along anymore, for whatever reason, and is eagerly awaiting his/her moment to strike. So, despite the best efforts of the Troika, its cronies and their pursuit of a pan-European nightmare, democracy in the developed world isn’t dead yet.

"Democracy... is a charming form of government, full of variety and disorder; and dispensing a sort of equality to equals and unequals alike." -Plato

Saturday, November 5, 2011

Deconstructing the Tower of Financial Babel

The Tower of Babel, according to the Book of Genesis, was an enormous tower built in the plain of Shinar.

According to the biblical account, a united humanity of the generations following the Great Flood, speaking a single language and migrating from the east, came to the land of Shinar, where they resolved to build a city with a tower "with its top in the heavens...lest we be scattered abroad upon the face of the Earth."

God came down to see what they did and said: "They are one people and have one language, and nothing will be withholden from them which they purpose to do." So God said, "Come, let us go down and confound their speech." And so God scattered them upon the face of the Earth, and confused their languages, and they left off building the city, which was called Babel "because God there confounded the language of all the Earth."(Genesis 11:5-8).

"No one gets angry at a mathematician or a physicist whom he or she doesn't understand, or at someone who speaks a foreign language, but rather at someone who tampers with your own language." -Jacques Derrida

Even the mainstream can no longer ignore the fact that mainstream dialogue in the world of finance has become nothing more than an endlessly reduced, reused and recycled cloud of type-cast words. I first visited complex human language and its modern-day "meaning" [or lack of it] in Language, Logic and Lies, which focused on the UN Resolution to invade Libya. There we saw that statements asserted as true, according to the "logical positivism" of Alfred Jules Ayers, don't have any meaning unless they are tautologies or are empirically verifiable.

Since then, our coherence-starved language has been reflected even more fundamentally by the volatile action in markets over the last two months, during which an assortment of European headlines, rumors, "communiques" and random statements came to dominate the collective psyche of investors. The "final" EU Summit to end all Summits (sound familiar, Europe?) on Wednesday (October 26) predictably turned out to be just another feebly-constructed stepping stone in our vast sea of contradictions and double or triple-meanings that permeates a never-ending, mind-numbing game of WordCraft.

Here were some of the most painstakingly recycled words that were involved - leverage, haircuts, guarantees, bondholders, SPIV (combination of recycled words), restructuring, recapitalization, voluntary, default, solution.

Jacques Derrida, the [in]famous French "post-structuralist" philosopher, popularized the process of Deconstruction as a means of analyzing academic literature across the human sciences. More accurately, deconstruction is an endogenous process that occurs within a work, typically finding its roots in the contradictions or omissions of the work's periphery, which then creep along towards its core and devour the entire argument. From the perspective of systems theory, it could be analogized to a process by which certain evolutionary systems sows the seeds of their own destruction over time.

Derrida's most oft-quoted phrase is "there is nothing outside the text", which meant that all "signs" (sounds, writings, pictures, videos, etc.) involved in human communication rely on an endless spiral of subjective context to imbue them with meaning, rather than reference to an external, "objective" reality that exists independent of the signifier. That may come off as a radical and ephemeral concept, but it's practical significance is painfully evident in modern society.

Derrida's Deconstruction takes a microscope to these signs, not to figure out what they truly mean or how to destroy their meaning, but to show how their meanings are naturally unraveling in the depths of our minds. Entire theories and academic arguments can be toppled by the context in which their signs are used, as that context may reveal any number of internal contradictions and circular, self-referential "terms of art".

Derrida's critics may claim that he is sitting comfortably in an ivory tower of "nihilistic" philosophy, willfully ignoring the plain-as-day "objective" meanings communicated by people in the "real world" on a regular basis. It is indeed counter-intuitive to think that what typically passes as "normal" social interaction or communication in our world is actually an elaborate, yet feeble sandcastle, patiently waiting for its moment to be washed back into the sea. That, however, is exactly the dynamic which we see in modern society.

The vocabulary of structured finance and "crisis response", those haunting specters which mask the "real world" to form an impenetrable membrane, has become more abstract and more ephemeral than post-structuralist linguistic philosophy could ever hope to be. Beyond that, we are all also becoming more consciously aware of this reality on a daily basis as the paradoxical headlines unravel and filter through. We now merely sit back and watch the global economic and financial system face the wholesale deconstruction of its internals.

Up to this point, and for more days/weeks to come, the structural flaws and gaping holes in the latest European "bailout" proposal have been analyzed to death by every multi-national parent corporation and all of their subsidiaries. As expected, very few details were actually provided on any of the key issues allegedly negotiated for days in a set of marathon Summits. Anything that could possibly shed some light on what exactly was agreed upon and how it can be accomplished will now only come in the upcoming weeks of November, at the earliest.

The sovereign debt markets have not taken kindly to the plan to make a plan, as Spanish and Italian bond yields continue to leak upwards. This article is not about re-hashing a previously conducted accounting analysis of a relatively non-existent plan (though some limited analysis will be included). It's about why every such iteration of the latest grand master plan will perpetually fail to provide any coherent and comprehensible "solutions" for our global economic predicament.

It's about using a specific example to establish an extremely general underlying point. One can label the argument a type of "doomerism" or "nihilism" if one wishes, but I suspect most readers have already recognized its significance in their own lives. Now, our systematic deconstruction of the "comprehensive and sustainable solution" out of Europe last week must start with the oft-cited "origin" of the sovereign debt crisis, Greece. Yet another bombshell has been dropped on European leaders and this time it comes from the Prime Minister of Greece, George Papandreou.

On Monday evening, G-Pap announced that the European plan allegedly agreed upon last week would not be accepted or implemented until it was put to the Greek people in a referendum. Make no mistake, this could be a terminal blow for the EMU. Regardless of what the Greek people vote to do (odds are not in favor of them voting for more austerity), or whether this referendum even occurs, G-Pap has just signaled that he is more than ready to give up on the pan-European Pipe Dream.

Greek PM Calls Referendum on EU Debt Deal

"The plan of initiatives calls for a confidence vote," Papandreou told his Socialist party lawmakers in parliament, moments after he had also announced a referendum would also be held on the EU deal. "The command of the Greek people will bind us," he said.

"Do they want to adopt the new deal, or reject it? If the Greek people do not want it, it will not be adopted," the prime minister said after protests were held around the country last week against his government's austerity policies."

The call for a referendum is an unprecedented move which tells the rest of Europe that the Greek politicians trust (or fear?) their own people much more than those other leaders attempting to impose economic reform on Greece from the outside, and that there will no be no "comprehensive" anything without the blessing of the average Greek citizen. Needless to say, this development was not anticipated by the EU leaders congregating last week, and it will completely undermine everything they had agreed to agree upon in the future.

Instead, the birthplace of democracy will be granted the right to exercise that democracy in perhaps the most important referendum ever held in the developed world. Like I said before, the odds are not looking good for a unified Europe, as depicted in the picture above and many similar ones. But leaving that issue aside for now, let's move on to deconstructing the "plan" further, under the generous assumption that it will survive a Greek referendum in the near future.


1) The plan calls for the 440 billion in capital already pledged to the EFSF, 290 of which is still unencumbered, to be "leveraged" into 1 trillion by providing "first-loss guarantees" on sovereign bonds of distressed members (PIIGS) for private investors and/or raising capital from outside investors (private institutions, sovereign wealth funds, etc.) through a "Special Purpose Investment Vehicle" (SPIV)

Let's start with the word "leverage". Right off the bat, we are discussing a term with dual connotations, as it could imply an amplifying effect that allows extra work to be done with relatively small amounts of force, or it could imply a destructive trait of developed economies that greatly increases systemic risks. In the eyes of EU political leaders, it carries the former positive connotation, but it carries the exact opposite in the eyes of the German Central Bank and a portion of the European Central Bank:

Eurozone Bail-Out: Holes Emerge in the 'Grand Solution’ to Solve EU Debt Crisis

"Jens Weidmann, the president of the Bundesbank and a member of the European Central Bank, sounded the alarm over the plan to “leverage” the fund by a factor of four to five times without putting any new money into the pot.

“It is tied to higher risks of losses and to increased sharing of risks,” said Mr Weidmann. “The way they are constructed, the leveraging instruments are not too different from those which were partly responsible for creating the crisis, because they concealed risks.”

The already ambiguous "leverage" term that could signify two diametrically opposed forces is proposed to be accomplished in one of the following two ways, or maybe both (no one knows yet):


a. The "first-loss guarantees" will be established by EU member states who agree to take a percentage of initial losses on peripheral bonds which are in "default".

What this scheme amounts to is the EFSF "guarantors" providing private investors with partial insurance on peripheral bonds, which will allegedly lower borrowing costs for the distressed states involved. Since a country cannot credibly sell insurance on its own bonds to lower costs (unless it's the U.S. doing it via the Fed and Primary Dealer banks), the guarantors will only be those states that are not in the process of drawing on the EFSF for aid.

The glaring contradiction in this proposed method of leveraging the EFSF through "guarantees" is found in the context of another part of the plan which deals with Greece. That part makes clear that a "50% haircut" [to be discussed more below] for holders of Greek bonds is not a technical "default" that triggers payouts on bond insurance contracts, i.e. credit default swaps. This is currently the position supported by the International Swaps & Derivatives Association (ISDA). The Wall Street Journal reports on this gaping conundrum:

Default Insurance Market Takes Hit by Serena Ng and Katy Burns

"A vast market in which banks, hedge funds and investors trade insurance against debt defaults got a jolt Thursday, sparking worries of new strains in the global financial system. Under the broad deal reached this week to stem the euro-zone's financial crisis, holders of credit-default swaps on Greek government bonds aren't expected to receive any payout, even though a preliminary agreement between financial institutions and European policy makers would recognize just half the face value of some Greek debt.

"The decision not to trigger the swaps raises questions about the value of the insurance-like contracts and exposes the limitations of the hedging strategies that banks and investors have come to rely on. The swaps are widely used by bondholders and major banks to defuse a wide range of risks, and by traders to bet on market trends. If the swaps don't pay out when bonds default, banks and funds that bought the insurance may face losses they thought they had hedged."

Bloomberg adds a bit to to the discussion as well:

Greece Default Swaps Failure to Trigger Casts Doubt on Contracts as Hedge by John Glover

"If they find a way to avoid a trigger event in the CDS, then people will doubt the value of credit-default swaps in general, leading to more dislocations in the market," said Pilar Gomez-Bravo, the senior adviser at Negentropy Capital in London, which oversees about 200 million euros. Credit-default swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a borrower fail to adhere to its debt agreements."

What seems to be missing in this discussion is the fact that the exact same logic can be extended to the EFSF bond insurance program, where "guarantees" are the equivalent of "insurance-like contracts" and would not have to be paid out as long as the remaining PIIS can restructure without technically "defaulting". There's very little doubt that Ireland, Portugal, Spain and even Italy will also be seeking to "restructure" their debts in the near future, as private deleveraging and austerity kills any remaining prospects for economic growth. They will want nothing less than the same deal Greece was offered.

Given the approach that has been taken by EU leaders and the ISDA with the Greek restructuring of allegedly 50% of its debt, it would appear very likely that a "default" can be avoided for any other distressed member state by the mere use of technically-laced propaganda, and therefore the guarantors would avoid any prospect of having to make good on their guarantees. All of that is another way of saying that, by definition, there are no guarantees involved in the new plan and the fund will not be leveraged through them.

So in the process of rendering sovereign CDS self-referencing (all countries are guaranteeing each others' debts), meaningless instruments of modern finance, the EU plan has also rendered its own plan for leveraging the EFSF through bond guarantees (insurance) meaningless as well. To assume that this inherent contradiction of the new plan is lost on institutional bond investors who rely on "hedging" strategies is to make a very dangerous assumption (Italian 5Y and 10Y bond yields are making record highs as I write). There can be no confidence in a market for insurance that consists of perpetual premiums and no credible prospects for payouts on the policy.


b. The guarantees will be established by external investors (private institutions, sovereign wealth funds, etc.) who agree to commit capital for peripheral bond purchases into the SPIV.

Here, we must refer to the over-arching context of an established plan to boost EFSF "firepower" to witness the absurdity underlying the proposed SPIV in the new EU plan. It turns out that those agreements reached by EU leaders in the wee hours of Thursday morning actually consisted of an agreement to travel around the world, hat in hand, asking for people to invest in the most publicized ponzi scheme in human history.

To get from €480 billion in existing capital for the EFSF to a proposed €1 trillion, the new EU plan apparently relies on outside investors (primarily sovereign wealth funds) to invest in the fund and expose themselves to even more toxic European debt. How can an agreement to "leverage" a fund through a "SPIV" be reached before some of the largest investors have even agreed to participate? It can't, and that's a fact weighing heavily on markets now, since China has once again said it will not be Europe's savior [Global Imperatives of a Chinese Exporter]. Al Arabiya News reports:

China's State Media Said Cash-Rich Country Won't Save Europe

"China’s state media Sunday warned that the country will not be a “savior” to Europe, as President Hu Jintao left for an official visit to the region including a G20 summit.

Hu’s visit has raised hopes that cash-rich China might make a firm commitment to the European bailout fund, but in a commentary, the official Xinhua news agency said Europe must address its own financial woes.

Europe is seeking to expand the European Financial Stability Facility (EFSF) to one trillion euros ($1.4 trillion), possibly through a special purpose investment vehicle or the International Monetary Fund.

China, holder of the world’s largest foreign exchange reserves at $3.2 trillion, said it wanted more clarity before investing in the bailout fund after head of the EFSF Klaus Regling, held talks in Beijing to try to win help."

More clarity, indeed. That's what everyone wants now, but they're never going to get it. The only thing that will be clear is that there cannot be any clarity in this world of WordCraft. China is well aware of this fact, and so are the major contributors to the IMF. The US is too politically volatile to bail out Europe in the approach to 2012 elections, the U.K. has already said it will not bail out Europe "directly or indirectly" and Germany has also made clear that its current contribution to the EFSF will not increase. Did anyone really think it would get around that promise through use of the IMF without the world taking notice?


2) EU leaders have announced banks must "recapitalize" their balance sheets in the amount of ~106 billion before June 2012 (Tier 1 capital ratio of 9%), by first seeking capital from private investors and then handing the beggar's bowls to their respective governments and/or the EFSF.

This aspect of the plan is perhaps the most circular and confounding. First of all, the estimate of what amount of capital is needed for the banks apparently materialized in the minds of EU leaders in the dead of night, like the ghost of Lehman's past. The IMF had previously put this figure at €200 billion, while a few of the banks themselves (granted, American banks) estimated the figure to be anywhere from €400 billion to €1 trillion (the size of the entire "leveraged" EFSF, if it were to ever materialize from pure hopium and desperatium into reality).

Second, this part of the plan is not really a plan to respond to the sovereign debt crisis enveloping Europe at all, but simply to tell European banks what they need to do, i.e. raise cash. How should they raise this cash? Well, that's still anybody's guess. They could go to the private capital markets, but the whole problem for the banks is that they are being progressively locked out of these markets as the reality of their exposure to deteriorating sovereign bonds becomes more clear. The plan to allegedly eliminate 50% debts owed by Greece (discussed below), to be followed by the rest of the Euro periphery, doesn't really help this cause either.

The other option is for the banks to go to European governments for capital directly, or indirectly through the EFSF, which, as explained above, is essentially a fund that consists of defunct "guarantees" from a bunch of tiny and/or insolvent countries, France and Germany. Simply put, this "option" is actually not even an option at this stage of the game, and so the banks are once again left to their own tricky devices for now. Bloomberg Business Week reports (and the article's title really says it all):

Europe Tries to Recapitalize Banks Without Injecting Capital

"European Union leaders ordered banks last week to increase the ratio of “highest quality” capital they hold by the end of June, creating a shortfall of 106 billion euros ($148 billion). Of Europe's 28 largest lenders, only eight will need to raise a total of 11 billion euros from investors, Huw Van Steenis, a Morgan Stanley analyst, wrote in an Oct. 28 report.

Rather than tapping investors or governments, firms are trying to hit the 9 percent core capital target by adjusting risk-weightings, limiting dividends, retaining earnings, reducing loans and selling assets. Banks had threatened to curb lending, risking a recession, to meet the goal rather than take government aid that would bring limits on bonuses and dividends."

Of course, both the banks and the governments are trying to spin this situation as one in which the governments have capital ready to hand out, as long as certain conditions are met, and the banks have the luxury of saying "no" to government aid, since they have their own resources to deploy and clever business strategies to pursue. The reality is that neither of those situations exist (the latter hasn't existed since 2008), and both the governments and the banks are simply consuming themselves with circular words and logic. There will be no systemic bank "recapitalizations", only systemic bank failures.


3) The plan calls for Greek "bondholders" to accept "50% haircuts" on the value of their bonds as a part of a "voluntary restructuring" of Greece's sovereign debt obligations.

Now here's a slice of WordCraft that couldn't be any more devoid of meaning than it already is. The term "bondholders", in almost any context, means all of the individuals or institutions which own the debt obligations of another individual or institution. Many times they are broken down by class according to seniority privilege or level of security. What that translates to in the new EU plan is a term that encompasses only a small fraction of those holding Greek bonds by value. Grant Williams explains:

Grant Williams: Things That Make You Go Hmmm

"Greece’s debt is roughly €350 billion. Of that, approximately €150 billion is held by the ‘Troika’ (including the €75 billion held by the European Central Bank) and this €150 billion is NOT subject to the haircut imposed on private holders of the debt. So that leaves us with roughly €200 billion.

Greek banks and pension funds account for (give or take a billion or two) another €85 billion and, though many number-crunchers apply the haircut to this slice of the debt pie, my own feeling is that it is untouchable as, if they are NOT ring-fenced these holders will be bust should they be forced to take the proposed haircut.

By my calculations, that leaves €115 billion needing to be ‘forgiven’. Apply the haircut to that number and you are left with a reduction in Greek debt of €57.5 billion - or 16%".

The point is not to figure out exactly how the new plan defines "bondholders", or what the "haircut" will actually be, but to recognize that the term can be subjectively twisted to have almost any meaning whatsoever, depending on who is doing the twisting, when they're doing it and to what aim. Now moving on to the term "voluntary", it is the most basic tenet of common contract law that an obligation made or modified under physical or economic duress is not enforceable.

However, what specific set of facts actually amounts to "duress" is not clear, especially in the relatively rare circumstances that have paradoxically become the normal circumstances of our financial environment these days, and especially in Europe. Does the threat of full-blown financial Armageddon count as a factor establishing the existence of "duress"? Maybe, maybe not. Regardless, that's exactly what was admitted to being threatened by EU leaders in the following statement, as Business Week reports:

Banks Were Persuaded by Leaders' Threat on Default, Juncker Says

Jean-Claude Juncker, President of the Eurogroup: "It was the fiercely rendered wish by the people, Merkel,Sarkozy, Juncker, that if a voluntary agreement with the banks was not possible, we wouldn’t resist one second to move toward a scenario of total insolvency of Greece, which would have cost states a lot of money and which would have ruined the banks."

That, then, is the state of "voluntary" financial decisions we are left with after some bureaucrats emerged from a hotel last week. It is no different from the one we had when Hank Paulson set foot in the U.S. Capitol Building in 2008, or when Merkel cautioned us not to take peace in Europe for granted before the last Summit began. The only difference now is that more time has passed, and more divisions have arisen between banks, the people and politicians. Greece couldn't make it to a 90% participation rate when the "haircut" was set at "21%", so good luck repeating the same mistake at "50%".


So, let's finally turn our attention to the last word relentlessly flaunted about in our hallowed game of financial WordCraft - "solution". It is a sad, yet undeniable fact that, what EU officials and politicians hail as a "solution" to the European sovereign debt crisis, many working-class people and factions of the populist media in the towns of Greece analogize to "the final solution" of Nazi Germany. They see European leaders endlessly convening in meetings and issuing "statements" while the people continue to suffer.

Who is "Angela Merkel", anyway? Is she the solemn Chancellor of Germany trying her hardest to maintain a peaceful Europe "united", or is she simply the modern-day reincarnation of the Fuhrer, Adolf Hitler, guiding Germany's 21st-century version of the Third Reich? Yes, that's a shallow question to ask, but the point is that it's nevertheless a question on a lot of down-trodden minds. We can either dismiss its underlying reality and gloss over it with meaningless rhetoric, or embrace it and understand it. Perhaps the new Greek referendum will help mitigate the discontent, but only time will tell the tale on that front.

Daily Mail: Furious Greeks Lampoon German 'Overlords' as Nazis With Picture of Merkel Dressed as an SS Guard

"Newspaper cartoons have presented modern-day German officials dressed in Nazi uniform, and a street poster depicts Chancellor Angela Merkel dressed as an officer in Hitler’s regime accompanied with the words: ‘Public nuisance.’

...Opposition parties blasted the landmark agreement, with conservatives warning it condemned the country to ‘nine more years of collapse and poverty’. But it is the fury of ordinary Greeks which is raising eyebrows.

Greek government officials who agreed to the belt-tightening moves have been portrayed in cartoons giving the Nazi ‘Sieg Heil’ salute. And German visitors flocking to ancient tourist sites are being met with a hostile welcome from some Greeks."

Let's take those sentiments and apply them to every President, Prime Minister, and elected or appointed figurehead and scatter them throughout every major city in the developed world, because that is the reality we are now face to face with. The Greek and German WordCraft is no different from that of Spain, Italy, France, China, Japan, the U.K. or the U.S., and their hollow reverberations are simply failing to wash over the fearful and loathsome minds of the dejected masses.

Hateful rhetoric, mass protests, violent riots and unrelenting strikes - those are the consequences we reap from weaving our meta-narratives with such chillingly empty words. Talk is cheap, but it is still proving too expensive for a world without economic growth and without any sense of lasting confidence or trust. At a certain point, the human intellect can no longer function inside Schrodinger's box of self-referential labels and cannot continue playing games in our world of WordCraft.

We will always be disappointed with what is presented as a "solution", we will always be frustrated with the lack of meaningful "progress" and we will always be angry at those who refuse to let us outside of the box. There will be no satisfaction found in this virtual existence of binary outcomes, political avatars and manufactured meaning. Only when the system's structures are fully deconstructed will we find any relief in the language and meanings of our future.

"Whatever precautions you take so the photograph will look like this or that, there comes a moment when the photograph surprises you. It is the other's gaze that wins out and decides." -Jacques Derrida