Form Friend of Alhambra Brian Cronin:

Greece is set to run out of money by the end of November if it doesn’t get the funds it needs to carry on. The representatives from the European Commission, the European Central Bank and the International Monetary Fund, collectively known as the troika bankers, have been trying to get the Greek government to raise taxes, make spending cuts and introduce the reforms needed in order to ensure they get the next tranche of bailout funds. They are known locally as the Men in Black.

In the 1997 movie of the same name and its subsequent sequels, Agent K uses a device called the Neuralyzer which, with a blinding flash, destroys witness memories for a given period depending on the selected setting and puts the target in a hypnotic state rendering them susceptible to suggestion or accepting of an alternate reality. I suspect that the Greek government secretly wish that they could be “neuralyzed” so that they could go back and undo the last few years of ineptitude and mismanagement. No such luck. They have to play the cards they’ve been dealt. However, it looks like it might not be all gloom and despondency.

Despite the wave of new protests and the seemingly impossible demands of the troika falling on the already hard-pressed, it is likely that an agreement will be reached. It will not be pretty and the Greek people won’t like it. The bills are coming due, and some of those bills are large enough to be “williams”. Giving them more money doesn’t obviate the need to deal with the structural imbalances in the economy. They are going to need outside help because they will not be able to do it on their own. Chancellor Merkel arrives in Athens this week to lend a hand and see how things are going. She will not be greeted with open arms since she is seen as the force behind the stringent measures being imposed upon the Greeks. There will be protests

Right now, it is a clash between the political will and the economic won’t. The political will belongs to the euro-powers: Greece cannot, must not quit the euro. West Germany decided to absorb East Germany in 1991 and convert its currency at a 1:1 ratio when it made no economic sense to do so. Greece must stay in the euro because the euro is a political idea not an economic one. An accommodation will be found because the eurozone itself is a shambles and the euro cannot go down in flames. ‘Saving the euro‘ and ‘saving Europe’ seem to have become interchangeable.

There are protests on the streets of Spain too. Catalonia is threatening to secede and the country’s banks need around €60 billion. There is a lot of discussion as to whether they will ask for a bailout or not. The ESFS/ESM is ready to give it to them, almost insisting on it, while Spain’s economy minister Luis de Guindos said last week that Spain does not need a bailout at all.

He has been doing the rounds of international investors and trying to sell them on the idea of establishing a so-called “bad bank” where all the bad and doubtful assets, mainly property loans, could be parked, thus freeing up lenders. This is not a new idea. Old hands in the financial markets will remember that Mellon Bank did this back in 1988 establishing, with government help, Grant Street Bank. Mellon, freed of bad loans, was immediately able to raise capital.

Though I suspect that markets would like to see Greece and Spain, and possibly Italy leave the euro, and maybe in a surprise move, even Germany opting out first, it won’t happen. At least, not the way investors want it to happen. If one or more were to move to the exits, markets would move and probably violently. You can’t make money if markets don’t move. That is essentially what the powers that be want to prevent. The countries themselves do not want to exit because it would be an admission of failure even though it might make a lot of economic sense.

ECB chairman Mario Draghi has said he would do whatever it takes to save Europe and is prepared to buy unlimited amounts of a distressed country’s bonds in the secondary market, provided it has asked for help. It would depress interest rates and give those countries renewed access to markets. But there is growing concern, especially in Germany, that this contravenes the ECB’s mandate. It is, after all, charged with monetary policy. The unlimited buying of bonds comes perilously close to state financing and thus tips over into the realm of fiscal policy, which is illegal. The dividing line between the two is blurred.

The ECB is permitted to buy bonds on the secondary markets for purposes of monetary policy, but, says Bundesbank chairman Jens Weidmann, what the ECB appears to want to do is a bridge too far. The Constitutional Court in Karlsruhe gave only a preliminary ruling on the legality of the ESM recently. However, it has yet to decide on the ECB’s bond purchase scheme. They may pass the buck entirely and refer the case to the European Court of Justice and let them decide, which would create further confusion and delay.

While the argument seems rather esoteric, it does have real world consequences. Monetary policy should be uniform and borrowing rates the same for business throughout the eurozone. It is quite evidently not the case because German business pays a lower rate for loan money than does a business in southern Europe, and that essentially is Draghi’s argument. The bond purchase scheme evens out the anomalies. Skeptics wonder, however, whether he is less interested in the business world in Europe and more interested in preserving the beleaguered governments to the south. A very slippery slope.

The Deutsche Bundesbank’s Herr Weidmann is one of those skeptics and has been openly hostile to the scheme. The Buba still has a very good reputation and does not care to see the ECB go down this particular road. There are plenty of critics here in the USA of the Federal Reserve’s QE3 buying of mortgage-backed securities with no end in sight until the job is done, suggesting it also compromises its mandate and sets it on its own slippery slope to damaging its reputation.

As an aside, it is a safe bet, if you are involved in the financial markets in one way or another, that people know you or know about you. You must therefore safeguard your reputation and act in no way to jeopardize it. So too, you would think, must the central banks.

At least in the United States, we have a federal government with taxing powers, banking supervision and a uniform national monetary policy. Unfortunately we do not have politicians who can act responsibly regarding fiscal matters so Mr. Bernanke skates on rather thin ice doing to remedy what he can.

In Europe, it’s a different matter. The plan for a banking union with its concomitant supervisory element is not going anywhere. Indeed there is even a plan coming from an advisory panel to the European Commission to break up the major banks in a sort of Glass-Steagall Act for Europe. It is, not unnaturally, running into a lot of opposition from the banks which see a diminution of their power and influence. Politicians see the benefits of not allowing banks to hold governments to ransom and making demands on them if they get into difficulties. You then get into the murky area of “too big to fail” to which many say “too big to fail is too big to exist”. But that’s a subject for another day.

In the meantime, the central banks are doing what they think is right. But I am reminded of Iago’s remark to Othello in Act III, scene 3: “Who steals my purse steals trash. But he that filches from me my good name robs me of that which not enriches him and makes me poor indeed.” It looks like the ECB and the Fed are doing a pretty good job of ruining their own good names and don’t need any help from outside.