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Boulger says King optimistic on eurozone summit

Yuan Phoon

October 26, 2011

King, governor of the Bank of England, said the EU summit meeting, at which European leaders are expected to agree a solution to the eurozone sovereign debt crisis, would only buy one or two years of breathing space, at a Treasury Select Committee meeting on Tuesday.

Boulger disagrees saying that what we have come to learn from successive eurozone summits is that they are all talk and no decisive action.

He said: “Merely writing off 60% of so of Greek debt will buy a little more time but the basic problems will remain unless Greece also devalues and it is hard to see how that can happen unless it escapes from the Euro at the same time.

“Furthermore it is not only Greece that is a problem but strains are increasingly appearing in most other eurozone countries and the markets are likely to run out of patience in less than two years.

“While the EU politicians fiddle the financial markets will almost certainly bring matters to a head in less than two years and the end result will be even messier than if the politicians had been prepared to accept the economic facts of life and act accordingly!

Boulger added that eurozone ministers still didn’t understand that the longer they prevaricate the worse the mess would become.

“Until they are prepared to admit that the whole Euro concept is fundamentally flawed unless there is fiscal and debt harmonization, for which there is little or no appetite, huge problems will remain.

“The question the markets will be asking is how far will the contagion spread, which country will be next in the firing line (probably Portugal, Italy or Cyprus) and when will the Euro break up.

“The fact that the politicians who agreed the Maastricht Treaty were so arrogant that they failed to provide an exit mechanism from the Euro now makes the situation more difficult as EU lawyers now need to cobble together the necessary legal processes to mitigate the major challenges facing not only any country leaving the Euro but also the other eurozone countries when that happens.

“Because it is impossible to solve the fundamental flaws in the Euro concept without adopting measures which will be unacceptable to most, if not all, of the eurozone countries, the best hope for common sense to return is that the thought of losing office in the 2013 elections will drive Angela Merkel to start recognising the economic facts of life. However, I am not holding my breath.

“Two years ago France could have been part of the Euro solution but now it is part of the problem, as is the home of the EU, Belgium. And this is not just a Club Med problem!

“Two years ago the yield premium on 10 year French government bonds over the benchmark German Bund was just 0.26%, Belgium bonds traded at a premium of 0.36% and the premium on Greek bonds was 1.34%.

“Now the premium on French bonds has rocketed to 1.12% and on Belgium bonds to 2.36%. For the record the Greek bonds, which at the time of writing are yielding 22.43%, now trade at a premium of 20.29% to the German Bund!

“The more the other eurozone countries have to contribute to the bailout fund the more their own credit ratings will suffer, which is a key reason why they can’t agree anything sustainable.

“The net result of all this is that for some time yet the eurozone banking crisis, which is caused by the eurozone sovereign debt, will degenerate further and because the major banks are now so interlinked on a global basis in their transactions with each other there will continue to be an impact on UK banks.

“Even if only as a consequence of the wholesale markets not working efficiently and the slow, but inexorable, increase in three month Libor.

“These pressures are likely to result in lower net lending from some of the major banks next year, but this will be partially compensated for by some of the smaller and medium sized banks and building societies and some of the specialist lenders, resulting in a modest overall reduction in lending volumes.

“One final thought on the eurozone crisis. Banks are forced by the Basel rules and other regulatory requirements to invest their tier one capital in ultra safe securities and one of the few options allowed in sovereign debt.

“Thus the regulators are also part of the problem as to meet regulatory requirements banks have to invest in ”safe” securities which it is now clear are far from that!


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