Monday, September 26, 2011

Lagarde takes her cues from Breugel

All this stuff we are hearing today in the press about a new solution to the debt crisis in the realms of financial fiction, trillion dollars here and there must be ringing bells amongst the participants in a recent think tank role playing game.

This is what is being talked about,
Europe takes centre stage as a new rescue plan seems to be taking shape. EU monetary affairs commissioner Olli Rehn said that Europe’s leaders are talking about extending the EFSF rescue fund possibly to the tune of EUR2 trillion. The EFSF is currently EUR440bn, but it could leverage its size by insuring the issuance of member states’ debt and linking up with the ECB. There is also speculation that the European Stability Mechanism that was due to come into action in 2013 could be brought forward.

The Brussels based think tank Breugel had. with the backing of Peterson Institute for International Economics and major city players Tudor and Blackrock dragged a number of key finacial types, policy makers and so on and billeted them in a castle near Chantilly on the 13th-14th September.

And here they played a game,
The solution?
In the war game the EU/IMF decided to expand the European Financial Stability Facility (EFSF) to between $3 trillion (£1.9tn; 2.2tn euros) and $5 trillion (£3.2tn ; 3.7tn euros). This was done by leveraging the 440bn euros supplied under the EFSF legislation going through European parliaments this week, plus match funding from the IMF. And by the ECB issuing "collateralised finance".

That is, by pledging around 700bn euros, they borrowed up to $5tn and then lent it to European banks and countries, starting with Greece. They got the money by mortgaging the assets of Europe basically, because $5tn is a lot. They mortgaged the EFSF money, and then the ECB borrowed money against the future tax revenues of Europe.

There were two interesting outcomes:

1. They saved the euro. Greece, Ireland et al stayed inside, now protected forever - certainly for the lifetime of the participants, who were mainly on the upside of 35 - by the wedge of money conjured from thin air.

2. It didn't solve the structural problems facing the periphery - but simply gave them more time to sort it out.

An account of the game reports:
"The large new lending facility was seen by some players as free money for errant countries without sufficient conditionality."
Interestingly George Soros spoke the day before, and wasn't very positive,
I note that Paul Mason of Newsnight covered this self same story last night.
This Breughel document is doing the rounds in Washington DC, and contains an uncanny blueprint for what might now be about to happen. However the term "war game" always summons up a defensive reaction in me. Not because I am against them: I am a bit of an addict. But they can be deceptive.

The Soviet high command shot and imprisoned staff officers who, between 1938 and 1941, argued that war game evidence suggested a mobile defence against a German blitzkrieg would be necessary. They relentlessly shaped the war game evidence towards the USSR's swift victory in a WW1-style "war of position". They did this by ignoring key facts.

Now, call me cynical but assembling 50 well-heeled types at Chateau Les Fontaines in Chantilly might not have given us the best hands-on understanding of how the actual people of Europe might take the issuing of $5tn of free money to once again save the banks.

Viz: the Germans and Finns might revolt against it, the Greek workers might take it and run with it, and Europe's trade partners/rivals might see it as a tad in breach of every global rule on the planet.

It was of course, Breughel the elder who painted this.

That's not cyncial, that is reasonable
An orderly Greek default and exit from the euro may be necessary; a disorderly default could precipitate a meltdown

On the second day, a simulation game took place among the conference participants in what amounted to a stress-test for European debt policy. The game was directed by Andrew Gracie of Crisis Management Analytics. Gracie is a former member of the Bank of England’s Financial Stability Group with a strong track record in running simulated games for central banks globally. No sitting officials participated and the game was held under the Chatham House rule. Participants played the roles of the governments of France, Germany, Greece, Ireland, Italy, Portugal, and Spain; decision-makers for the ECB, IMF, and United States; and decision-makers in commercial banks in the countries involved and non-bank financial market actors. In addition, in response to successive rounds of the game as it unfolded, other participants provided expertise in the areas of credit ratings, legal and accounting issues, and political repercussions. As the simulation unfolded, a solution to fend-off speculative attacks was found

No comments: