LATE UPDATE: This is how Germany is reacting.
And on it goes. Spain is now in the firing line of government bond speculators with the ‘yield’ on its bonds rising. This has led the credit ratings agencies to lower Spain’s status, which, in turn, will force up the interest it is charged to borrow money. I had only a vague idea what ‘yield’ was until a year or two ago when I came across a very clear explanation. It was this: a government bond promising a (say) 4pc interest is sold for £1. That means that after one year it will pay back £1.04. That is if things are going well. But if things are going badly and those who hold the bonds fear they might not get their money back, they will play safe, sell them now. However, those they sell to will know the score (that the seller is playing safe and wants to sell – it’s thus a buyers’ market) so they can offer less than £1. Say, for example, they buy at 80p, when the bond matures they will still be paid £1.04, which is a damn sight more than 4pc of the money they stumped up. Thus the bond is ‘yielding’ more. And so when the headlines read that ‘yields’ on government’s bonds are rising, you know things are bad for that government. Of course, the risk those buying the bonds are taking is that the government might become so insolvent that it cannot afford to cough up the cash it owes: thus the usual equation, the higher the risk, the better the prospect of making a good profit.
A consequence of falling bond prices is, of course, that when that government wants to borrow more money and issues more bonds (all too often to pay off debts it already has – you thought only individuals can be that daft), it will be obliged to offer a higher ‘return’ – a better interest rate – merely to attract buyers. And if those new bonds are also eventually offloaded at a lower price than their face value (a ‘discount’), the yield will be even higher. It is that kind of downward spiral Spain now soon find itself in.
I must apologise for my Dick and Dora mini lecture in economics. There will be some of you for whom this kind of financial jargon is second nature and who will regard my exposition as something of an insult to their intelligence. But there will also be others who are like me – who can be slightly bewildered by it all and who need to understand it from the ground up. All too often in the past I have thought I understood something, only to discover when I was asked to explain it to someone else that I merely thought I understood it. That is something of an acid test: if you can explain something clearly and succinctly to someone else, the chances are you know what you are talking about. If, on the other hand, you find yourself stumbling, usually within just ten seconds of starting your explanation, be honest: you didn’t understand it at all.
The problem is compounded in finance (rather than economics) because a fair degree of deliberate obfuscation goes on to put a rather better gloss on matters. If you read about a company being ‘highly leveraged’ or ‘highly geared’, just substitute the words ‘owes a lot of fucking money to a lot of fucking people’ (delete the gratuitous expletive if you like, it’s all the same to me) and you will have a clearer idea of what is going on. Of course being ‘highly leveraged’ and ‘highly geared’ sounds a lot more stubenrein than being ‘deep in fucking debt’, although what puzzles me is that the only ones kidded along by such euphemisms are those who are of no consequence whatsoever (i.e. you and I). Those who are of consequence – lenders, investment banks, hedge funds and rival companies – aren’t fooled for a moment.
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Also in the firing line, apparently though surprisingly, is Belgium. In its case, the awful and cynical ‘money markets’ out to wreck the EU (as some believe. Do they wear black masks and carry six-shooters strapped to their waists?) are concerned that, as silly as it might sound, the country doesn’t actually have a government. Obviously, someone somewhere is making some decision, probably a legion of Belgian civil servants, but if push came to shove and ‘government-level’ decisions were demanded by the European Central Bank and possibly the IMF, the phone would ring and ring and ring, but remain unanswered. Not a happy state of affairs, though one which has carried on for six months. Because one credit rating agency has shifted Belgium’s rating down from stable to negative, it is now being seen as possible future candidate for an EU bailout. Given the country’s lack of leadership, it is an irony that the
EU’s headquarters are in its capital and that it was one of the ‘project’s’ original cheerleaders. Oh, and a former Belgian Deputy Prime Minister (in a time when the country was still capable of agreeing who should form the government) is the first European Council president Herman Van Rompuy (a name which to British ears sounds rather silly. A cheap shot, I know, but I can rarely resist cheap shots. Here’s another, that old joke: name three famous Belgians other than van Damme, Simenon, Herge and that painter chappie everyone knows. You have as long as you like, longer if necessary). The media, never shy about either cheap shots or catchy acronyms in new habitually referring to the defaulting nations as the PIGGS – Portugal, Ireland, Italy and Greece. My view is that it is not a question of whether the euro will collapse into several rounds of recriminations, but when. Anyone who is even on nodding terms with a knowledge of the German psyche will know that the nation’s goodwill – as opposed to its government’s goodwill – and its willingness to substitute the riotous lifestyle of southern European ne’er do wells is not infinite. And I really don’t blame them.
Van Rompuy rather blotted his copybook a few weeks ago when he announced that the EU faced ‘a survival crisis’. Yes, Herman, I think we all know that, but the trick is for a politician to brazen it out until the water is already lapping around his ankles. Anything else, and the crisis just arrives a lot sooner. Must try harder.
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Ironically, the ‘banking crisis’ had absolutely nothing to do with fundamental economics or sophisticated ‘financial instruments’ or any of the other hi’falutin, virtually incomprehensible jazz that high finance resorts to in order to throw us off the scent. It was nothing but the lowest scummy human behaviour of turning a fast buck while the going was good. On the back of the insane rush to allow everyone and his pet goat to ‘get onto the housing ladder’ before prices rose any further, mortgages were handed out like sweeties at a children’s party. But it wasn’t what caused the crisis. The debts – I can’t remember the bullshit phrase used to avoid using the term debt, but I do know it involved the weasel word ‘collateralised’ which can mean anything but actually means nothing – were bundled up and sold to others – and a nice commission was earned on the sale. But don’t feel sorry – not that anyone does – for those who bought them, for they only bought them up in order to do exactly the same: they divvied up all the debt they had bought, repackaged it, a bit of this with a bit of that, then they, too, sold them on – and they, too, trousered a handsome commission. And so on it went for several years. They all knew that at some point it would have to stop, but they also knew they would not be obliged to pay the bill. And so it was: ‘Our banks,’ the governments pontificated, ‘are too big to fail. If they fail, we fail, and we cannot afford that.’ And so they were bailed out with taxpayers’ money, although the taxpayer wasn’t ever consulted. Had he done so, the response would most certainly have been – though couched in more diplomatic language – ‘look, this is far, far too important to concern the little man. We know best.’ Unfortunately, they didn’t ‘know best’ when the scam of providing anyone with a mortgage who was prepared to tell the right lies was at its height. Despite many, many warnings – articles in the printed Press and any number of TV documentaries providing clear evidence that the mortgage industry was well out of hand, the government – in this case Labour – did nothing. Why, it will have asked itself, spoil the good times. People feel wealthy, so why be honest and spoil it by informing that that borrowed wealth is no kind of wealth?
I am quite prepared to concede that in his analysis of capitalism (or what I know about it, gleaned from here and there, the backs of cereal packets, that kind of thing) Karl Marx was spot on. We’re I think he came unstuck was in his prognosis – that capitalism will collapse in on itself – and in his suggestions for an alternative system. And my that conclusion is backed up by an impeccable Marxist body, the Communist Party of China. They, too, seem to have decided that making everyone middle class (except for the saps who must stay working class to service the middle class) is the way to go. And in the process they are busy creating the next world crisis. For when China’s housing bubble burst, it will be very bad news for us all.
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It was off to Hamburg yesterday morning for the funeral of an aunt, my mother’s sister, then back to Blighty again last night and in bed by 7.45pm to finish watching Shutter Island, which is very, very good. Although the occasion was very sad, it was good to see my two cousins again, my uncle and my cousins two extremely attractive two daughters. It reminded me once again how I feel more at home doing things the German way and how in many ways I think I might be more German than English. Having said that though, I should also report that my nephew, the son of a German and my half-English, half-German sister spent a month and a half working in England last summer and told me one of the aspects he likes about England is that it is, by and large, freer and easier than Germany. Years ago, another German, a journalist who had settled in London, told me that what he particularly liked about England was that he could mix with and include in his social circle anyone he chose and liked. In German, he told me, he, as a professional, was obliged to stick to those like him. I merely report what he said. I cannot claim to know what he is talking about because when I actually lives in German, I was a young teen and wouldn’t really notice these things. I suspect that in some ways, were I to live in Germany, my attitudes, behaviour, and loud mouth would go down like a lead balloon.