On Thursday, the Spanish government’s borrowing costs came within a whisker of their euro-era high. Madrid’s 10-year bond yield jumped back above 7pc in a poorly-covered €3bn auction.
Trying to minimize its immediate financing costs, Spain has recently skewed its debt sales towards short-term instruments. Ominously, though, yields are soaring even on 2-year debt. Sovereign bonds for 2014 repayment were last week sold only at a huge 5.204pc yield, with Madrid now paying a fifth more for short-term money than it was six weeks ago. Even at these sky-high rates, the 2-year auction was also poorly-covered.
While seemingly arcane, these developments are extremely alarming. The market is now very seriously questioning the fiscal viability of the eurozone’s fourth-largest economy. Spain, there can be no question, is now teetering on the brink of a full-scale sovereign bail-out. This is despite Eurozone Finance Ministers last week unanimously approving a €100bn bail-out of Spain’s rancid banks. Yields soared anyway, European equities tanked and the euro hit a two-year low.
For all the summitry, investors clearly don’t view current measures are enough to “save the eurozone”. Only unashamed bond-buying by the European Central Bank, the argument goes, hoovering up a litany of sovereign and private junk, to be inflated away, can buy the eurocrats more time.
Yet the chances of that happening remain remote. The “eurozone solvents” won’t allow it – Germany chief among them. So, the bank-sovereign doom loop draws tighter, and borrowing costs spiral. While Europe could probably rescue Spain, just, Italy is simply too big. It is worrying, then, that Rome’s 10-year bond yield also climbed sharply on Thursday, peaking above 6pc.
Having shown the eurozone a lot of latitude, the rest of the world is on the brink of losing patience. With a Presidential election looming, and the eurozone debacle hindering a US recovery, America is particularly miffed.
The International Monetary Fund last week issued an “Article IV Consultation Report” which really was quite extraordinary. “The euro area crisis has reached a new and critical stage,” boomed the world’s leading financial watchdog. “The adverse links between sovereigns, banks, and the real economy are stronger than ever … and financial markets in parts of the region remain under acute stress, raising questions about the viability of monetary union itself”.
In structural terms, the single currency “is at an uncomfortable and unsustainable half-way point,” observed the IMF. The euro area is “sufficiently integrated to allow escalating problems in one country to spill over to others, but lacks the economic flexibility or policy tools to deal with these spillovers”.
The Washington-based IMF only makes important statements on the initiative of the US government. This statement, though, was made at the urging of China too. The IMF is now insisting on full-scale Eurobonds, a genuine, loss-sharing banking union and “sizeable” ECB money-printing – on top of covert QE that’s already happened. And any extension of the rescue attempts already made, particularly if they extend from “the periphery” to a big eurozone economy, can only happen with the IMF’s agreement.
Will Berlin accept the IMF’s verdict? Even if Chancellor Merkel says “ja”, will that be tolerated by Germany’s increasingly irate citizens, its Bundesrat and its Constitutional Court? Will the rest of Europe accept the voter-subjugation needed to convince even Merkel to entertain such financially ruinous policies? For my money, “fiscal union” is politically unobtainable, culturally unthinkable and logistically impossible, whatever the IMF says. That’s why it won’t happen.
It would be wrong to forget that, beyond this eurozone crisis, sub-prime itself remains an issue of immense significance that almost all Western countries need to address, whether members of monetary union or not.
With that in mind, it strikes there are at least two stark lessons from the 1929 Wall Street crash, and the Great Depression which followed, that we all seem determined to ignore. In the early and mid 1930s, Franklin D. Roosevelt got hold of the “Wall Street titans” and showed them who was boss. Banks were forced, under threat of criminal prosecution, to disclose their full balance sheets. Those beyond repair were broken up. Famously, retail and investment banking were separated, root-and-branch, by the Glass-Steagall Act.
Compare that with today. In the US, Britain and elsewhere, the policy response to sub-prime has been infantile. Our “political leaders” are cowed by the money-men, caught between awe and financial dependence. Many Western banks remain beyond full-audit. Those guilty of serious “white collar crime” have sailed away, their riches in tact, leaving nothing in their wake but financial and human destruction.
Where is our modern-day Pecora Commission – the Congressional hearings held in 1930s, which unearthed and demystified the frauds, scams and abuses that culminated in the Wall Street crash? Where is our “truth and reconciliation commission” to get to the bottom of what happened, punish the guilty and stop “sub-prime” happening again?
A former assistant district attorney from New York, Ferdinand Pecora had intellect and stamina in abundance. His relentless and expert grilling of bankers and regulators, fully-open to the public, electrified Depression-era America. Pecora was the immigrant son of a Sicilian cobbler, outside the establishment, which is why his investigation was fearless and, ultimately, effective.
The famous financiers and banking scions, they didn’t faze Pecora. His probings exposed the murkiest corners of Wall Street, catalyzing genuine reforms and restoring public trust in bankers and banking, so laying the foundations for America’s post-war prosperity and financial stability.
Back in the present, the UK’s Treasury select committee, under-resourced and appointed by party whips, has tried and fail to lay a hand on the bankers. Now, the committee is to more fully investigate “Liborgate”, but only after having been stripped of several members who have displayed a detailed knowledge of banking. With the best will in the world, it just isn’t going to work. But perhaps that’s the point.
Along with bank restructuring, and sub-sectoral separation, the other key lesson from the 1930s relates to trade. The Great Depression was so bad, not so much because of the Wall Street crash itself, but because of the protectionist policies implemented during the climate of fear which followed. In 1930, Herbert Hoover signed the Smoot-Hawley Tariff Act, raising US import duties on almost 1000 types of goods. This sparked a range of “tit for tat” counter-measures by America’s trading partners, ushering in the economic isolationism that stymied growth and progress, doing a great deal, throughout that ghastly decade, to push the world towards fully-blown conflict.
Slowly but surely, protectionism is on the march once again. High Western unemployment, and renewed economic weakness, means lawmakers are bowing to vested interests and restricting international trade. Such barriers come in all sorts of complex forms, and are difficult to quantify. But last month, Pascal Lamy, Director General of the World Trade Organization, said the recent rise in protectionism is “alarming”. The EU then issued a study, barely reported, which referred to the “staggering” rate at which trade barriers are increasing.
The WTO warns that world trade will decelerate sharply this year, increasingly by just 3.7pc. The result will be much slower GDP growth, making it even harder for highly-indebted Western nations to address their fiscal woes. The Great Depression taught us that protectionism doesn’t protect anyone and, once in place, trade restrictions are extremely difficult to remove. Yet the restrictions are piling-up anyway, another reason the Western world is failing to recover.