The old adage states that if you owe the bank $1 million, the bank owns you. If you owe the bank $1 billion, you own the bank. This is the Eurozone crisis in a nutshell.
The Italians and the Greeks (just to pick two) owe the "bank" tens of billions of Euros. Amongst their creditors are French and German banks. If Greece and Italy go down, so do those banks. Ergo: they own the banks. The Italians (especially) and the Greeks understand their leverage.
Angela Merkel understands it as well. She is being told by all right-thinking persons that she must commit her nation to the bailout of the deadbeats. She knows that if she does as she is told, she will (a) lose her her job, and (b) leave Germany laden with even more bad debt than it already holds.
Unsurprisingly, she is requiring that before she does what all right-thinking persons think she must, she be given control over all deadbeat budgets. She is doing this in part to placate domestic constituencies. She is doing this in part because it's the very German (uber alles) thing to do. But she is doing this mostly to buy herself time.
The first rule of effective executive management is: procrastinate. If a business or a government or a global economy depends in large measure on what the most senior executive decides, then there is every reason for that senior executive to take his or her time before making final decisions. Merkel has resisted every effort to stampede her toward a right-thinking decision.
She has, in fact, been procrastinating for months, in large measure to increase the "circle of concern" to include the two wealthiest nations on earth, the United States and China. Her leverage is that if the eurozone collapses in a heap, the global financial system will collapse with it. And if that happens, the recession of recent years will, by comparison, feel like boom times.
As a result, Merkel owns the bank, which is to say that she is in a very strong position to insist that the United States and China step up to help shoulder the burden of bailing out the deadbeats. She has already had considerable success in getting the US to dance to this tune; the coordinated central bank "dollar swaps" led by the US Federal Reserve were executed to "assuage" Merkel and "save" ( at least for the time being) the eurozone.
She is now putting the screws to US Treasury Secretary Timothy Geithner, letting him know in so many words that the IMF (led by the US) has to step in and take a "leadership role" (as they say in G7 speak). Mr. Geithner is a known believer in bailouts; he was one of many insiders who thought the decision to let Lehman Brothers fail was a "disaster."
Merkel knows this, of course. She is sketching out for his consideration a much larger "disaster," a game-ender of cascading financial collapse. The longer he has to think about it, the more urgently he will argue that the US cannot sit idly by.
Former Treasury Secretary and former Obama national economic policy advisor Larry Summers, thinking several steps ahead, concedes Merkel's point in today's Financial Times. One suspects he was sending a message to President Obama which essentially read: "you're going to have to do this anyway, so you might as well get out in front of it and get control of the term sheet."
The fact is that the eurozone sovereign debt issue (which is a solvency issue, not a liquidity issue) won't resolve itself (because it can't possibly do so) unless the IMF steps up and provides an avalanche of cash. The situation is so bad, in fact, that it might also require the Chinese to step up as well.
The Chinese won't step up directly, but they might find it in their interest to buy yet more US debt if that debt is specifically used to alleviate eurozone financial stress. That would enable the Chinese to elide the question of bailing out deadbeats, increase their leverage with both the United States and Europe and have the US on the hook (instead of the deadbeats) for paying back the money. A smart deal for them, it would seem.
Ms. Merkel doesn't care how the money arrives, of course, she just needs the money to arrive. We are now entering the endgame -- decision time -- to prevent the markets from seizure. So the next two days are likely to engender a lot of "doomsday" press coverage and commentary, much of it spoon-fed by unnamed German ministerial types. It's manifestly in her interest to take this all the way to the edge.
At the breaking point, she truly owns the bank. She can say, with complete credibility, that the eurozone is going down unless the IMF stands up. She can say, with complete credibility, that the collapse of the eurozone will take the entire world down with it.
And, at that very point, the IMF (which is to say the United States of America) will have to fold its hand and do what she asks. And then and there, Germany, without firing a shot, owns Europe.
Friday, December 09, 2011
Posted by John at 12/09/2011 12:47:00 PM