But this brief hiatus came to a dramatic end on Friday. First, talks in Athens aimed at persuading Greece's creditors to voluntarily accept a writedown on what they are owed stalled, amid rumours that hedge funds – which have insured themselves against the risk of collapse with credit default swaps, and therefore will get a payout in any event – are refusing to join in.
While the markets were still digesting the news of the standoff in Athens, rumours began to emerge that Standard & Poor's was poised to take the axe to the ratings of a string of eurozone countries, including even France. S&P had warned late in 2011, in the runup to the fateful Brussels summit, that it was re-examining most eurozone countries' ratings because it was concerned about their exposure to the sovereign debt crisis and unconvinced by politicians' response.
Then, after the European markets had closed, S&P confirmed that it was, indeed, stripping France of its coveted AAA rating and downgrading another eight countries, from bailed-out Portugal to the island of Malta. Across the eurozone, only Germany, the Netherlands, Finland and Luxembourg now retain S&P's top rating.
The European scene does present one encouraging contrast to the US when it comes to the crooked rating agencies. European leaders are inclined to say, "What the hell do these American rating agencies think they're doing? We need to get some honest and independent rating agencies going."
During the ludicrous fight in the US over the debt ceiling last year, the Republicans acted as though S&P were the voice of God when they downgraded the US credit rating. Real interest rates on US bonds actually went down after the downgrade, something that always comes to my mind immediately now when I hear S&P mentioned. How wrong could they have called the situation.
But did we hear our Democratic President, the one now campaigning as the defender of the 99%, scolding the rating agency for being incompetent and/or crooked? He's far too concerned about not ruffling feathers on Wall Street or the boardrooms to do what conservative and social-democratic leaders in Europe are doing in response to S&P's downgrade of eurozone countries' credit rating. To be fair, the Administration did argue publicly that the downgrade was based on incompetence; they weren't totally silent or completely deferential. But as he normally does, Obama decided to pass on a chance to build public support against abuses by the financial sector, including the rating agencies.
As it turns out, part of the reasons Standard & Poor's is giving for their downgrades is that Angie-nomics, the austerity policies that Princess Angela von Merkel is insisting on during this depression will damage the eurozone economies and thereby make the debt situation worse. Austria's Social Democratic Chancellor Werner Faymann scolded S&P. But he and the Austrian President Heinz Fischer, also a Social Democrat, insisted that the downgrade gives more urgency to Feymann's own Angie-nomics proposal to write a "debt limit" into the Austrian Constitution. It's a dumb idea to begin with and will do nothing to help the euro crisis or Austria's own credit rating.
Part of Austria's current vulnerability is that Austrian banks have a lot of lending to Hungarian companies, and Hungary has its own debt and economic problems to worry about even though they aren't part of the eurozone. And they have a political confrontation with the EU pending due to the seriously authoritarian turn of the current ruling Fidesz Party headed by "kookoo autocratic" President Victor Orbán.
But part of the consideration of all the non-German EU countries here has to be avoiding being the first one to pull the plug on their membership in the eurozone and the EU. The prime candidates for that are still Greece and Italy, with Greece likely to be more in the spotlight this coming week. And one encouraging sign is that, if this report by Carsten Volkery is any indication, Neuer Vertrag.Etatsünder bohren Schlupflöcher in den Euro-PaktSpiegel Online 15.01.2012, other eurozone countries are balking at the key element in Angie's current power-play, which is her demand that the EU (read: Germany) have veto power over all EU countries' budgets. (The actual language has to do with debt and deficit limits and the mechanism for enforcing them.) Volkery sources his story to two Angiebots, Jörg Asmussen and Elmar Brok. Even though Asmussen is SPD, he supports Angie-nomics and is a toady for the finance lobby. Brok is part of the drafting committee for the new budget treaty Angie is pushing; Brok proudly displays a photo of himself with Angie on his website as of this writing.
Angiebot Elmar Brok with the Princess Angie von Merkel
The two Angiebots are obviously disturbed that the lesser nations aren't bowing to Her Majesty Angie's demands without question. Angiebot Brok is bragging that the Angie's negotiators have succeeded in blocking any provisions that might allow the creation of Eurobonds, bonds backed by the credit of the entire eurozone but available to use for expenses of individual countries. Since if the euro is going to be saved - which seems an unlikely prospect to me - Eurobonds would have to be part of the solution, that's really nothing to brag about. But I'm sure Her Majesty is proud of him for being a faithful Angiebot on the matter.
Angie's Foreign Minister Guido just went down to Greece making them an offer he and Angie presumably think they can't refuse, which is more austerity, more austerity, more austerity. (Westerwelle ermutigt Griechen zu weiteren ReformenWelt Online 15.01.2012) The problem is the same as it was in 2009. Greece has too much debt and it can't repay it all. The EU late last year did agree to ask banks to voluntarily take writedowns on Greek bonds. The voluntary part is important, because investors have insured themselves against losses by the use of the financial derivatives known as credit default swaps (CDS). If the default is technically voluntary on the part of the creditors, the CDSes aren't triggered, i.e., the banks that sold the CDSes aren't on the hook for the payouts. This is part of the worry of why even the default by Greece, which has a small GDP, could trigger a European and world financial crisis. European banks are undercapitalized, and derivatives market is still so poorly regulated that the European and American regulators don't know for sure how large private banks' CDS exposure to eurozone debt is. Once the CDSes start triggering, we could be looking at a "Lehman event", or far worse. (The dialogue at the link has some dopey parts.)
As negotiations get down to the wire on the next tranche of aid to Greece, hedge funds are balking on taking "voluntary" writedowns on Greek debt and therefore forgoing collecting on their CDSes. Guardian economics editor Larry Elliot frames the current situation with melodramatic but descriptive imagery (Eurozone crisis: Troika's gunboats will get their way, at a cost 01/15/2012):
The warships have been replaced by spreadsheets. Back in 1850, Greece knew it was in trouble when the Royal Navy arrived at Piraeus. This time, the pressure comes from banks, hedge funds and the team of officials of the International Monetary Fund (IMF), the European Central Bank (ECB) and the EU, who will take up residence at one of the swankier hotels in Athens.
But his more sober description is also correct: "A three-way game of bluff is currently in progress between the Greek government, the hedge funds and bankers, and the troika (the IMF, the ECB and the EU)."
Bottom line: the European ruling elites are continuing to deal with this crisis with the same level of realism, vision and good sense that their predecessors in 1914 were applying to events of their day.