Eurozone troubles.... all originate in a wish to get back to normal?

In the recent days I've read a book by J. Beyen called: 'het spel en de knikkers'. It's a Dutch autobiography describing the life and career of a banker, central banker, former President of the BIS, Executive Director at the IMF, Minister of Foreign Affairs and so on. Beyen was for example one of the important Dutch delegates at the Bretton Woods conference. And his book - in particular the episode on the golden standard - is fascinating.

Golden Standard as the solution or the problem?

Until the First World War, the golden standard had become the de facto monetary norm for governments/countries. It consisted of a set of fixed exchange rates, which meant that local economies sometimes had to suffer, as devaluation was impossible. On the other hand, it allowed for a lot of international trade and stability and was thus praised and adopted. Until the First World War changed a lot and the golden standard was abandoned.

In his book, Beyen describes the major sentiment of policy makers after the First World War. And he calls it the desire to go 'back to normal'. A central theme in this desire was the re-establishment of the Golden Standard. Beyen also describes that monetary thinking at that time wasn't as advanced as in 1968 (when he wrote the book) He sketches that the system of fixed exchange rates in itself burdened the European economies, but policy makers weren't able to see this at the time: obsessed with getting back to normal.

Current flaws in Euroland thinking: still seeking a back to normal?
The musings and discussions all around Europe these days, in particular the new plans on a banking union, fascinate me enormously. The singlemindedness with which politicians now move forward into more Europe, more joint policy, more deposit guarantee may be variations on a similar desire: back to normal. Back to the Europe from before the crisis, using the same policy tools and concepts that we used before the financial and sovereign crisis broke out.

As a result, we are now witnessing policy makers, fully caught up in their goal to save Europe by designing futher institutions and policies.  But, essentially, our politicians and civil servants fail to recognize that the European car doesn't respond any more to twists of the steering wheel. The only thing that has helped (only temporarily) is throwing money at the problem.

Are we missing something here?
While our monetary thinking may evolved quite a bit since the 1930s, our knowledge of policy and strategy making is not as widely and heavily discussed and modeled. In theory we could all be aware of mechanisms such as groupthink, tunnel vision, decision complexity, resource complexity etcetera. But in practice we fail to properly recognize and address the fundamental errors in policy making.

Having read the autobiography of Beyen, I tend to believe that we are now learning new lessons in the Eurozone. And the lessons are not so much related to monetary theories but to international policy making under stress. I therefore hereby propose the concept of policy illusion to be better recognized in the future. It is the understandable tendency of policy makers to continue doing what you were doing all the time, even when the world fundamentally required a different way of looking.

And so we can now see our policy makers making policy by looking so intensely at the rear-view mirror that they will miss the fork in the road ahead.

Dutch magazine finds out that preview of Wilders' book is inaccurate...

Now that Geert Wilders has side-stepped in Dutch politics to become an opposition party, he has more time to promote his upcoming book, which will be published in the US. And it will of course be full of his ideology: how the islam is terrorising the West, how he is the victim and what we all should do about it. And a Dutch magazine has been allowed a read through of the book.

The interesting thing that occured is that the Magazine started fact-checking the book. Because somewhere near page 140 (in the Chapter Conquest) Wilders describes how he is being robbed by three Arab youth in his neighbourhood: Canal Island.

The true story however unfolds now in HP Magazine, which checked other books and sources (among which his own brother) to find out that:
- Wilders was attacked from behind and he has never ever seen the attackers,
- he was not in the Canal Island borough when being attacked but a well-to-do neighbourhood.

It's yet another example of how keen he is on living and portraying the world according to his truth.

Bernankes blunder or Bernankes brilliance ?

About one year ago, the FED-President Bernanke started giving press conferences to explain the policy decisions of the Federal Open Markets Committee. I was pleasantly surprised then, but I was also a bit wary of the continued low interest rates. With the risk of being hilariously wrong I think his recent choice to state that the FED will keep the interest rate low for a number of years, is a horrible mistake that will cost us significantly.

One thing to remember of course, is that monetary policy at low interest rates is really Bernanke's cup of tea and expertise. In this research paper of 2003, he essentially describes all the possible policy measures of the FED:
- committing to low interest rates for a longer time frame (thus shaping expectations),
- changing the composition of the balance sheet (for example buying treasuries or swapping maturities),
- changing the size of the FED-balance sheet.
And in hindsight we can see that this is precisely the road map that the FED has been following the last years.

So why do I think this long period of low interest rates is wrong?

My main argument is quite simple. For markets to function properly, there must be uncertainty with respect to the real economy but also with respect to the behaviour of monetary authorities. This uncertainty by definition leads to a distribution of market expectations with some being more bearish and others more bullish. Thus, uncertainty is helpful as it creates the maximum liquidity in a market and maintains an overall balance with respect to divergence of expectations of the future.

Following this line of thought, the announcement of future low interest rate (for a long period) by the FED is the equivalent of giving a serious prolongued committment. And while this is done on purpose, with the aim to help out financial markets, I think it reduces uncertainty too much. Market participants will expect the FED to behave this way and the market will be robbed of an important uncertain factor. Thus, the market will become flawed and market expectations will not be balanced or evenly distributed any more. As a consequene the FED only stands to lose now, if for some sudden reason the market circumstances require a reversion of the outspoken low interest course.

I think that right now we are already seeing the effect of the FED behaviour. The effect of the low interest rate now leads some players in the US to desire negative interest rates on bonds. And in my view this is only the beginning. And therefore I am now officially going on record stating that Bernanke - brilliant as he may be - has blundered into a serious misstake here.

France and Germany wish to soften the Basel rules...

It's about a year ago that I outlined in this blog that the European politicians had a choice to either continue the introduction of planned bank regulations (leading to no growth in the future and Europa as an open air museum) or to postpone them. Today we can read in the Financial Times that France and Germany indeed wish to slow down the introduction of Basel 3 rules.

While I think that this is indeed the better way forward, things did change in the last year. We have become aware that our governments in Europe are quite unable to tackle the serious issues at hand. It took Merkel and Sarkozy a year to discover that their Deauville agreement with Private Sector Involvement was a shot in their own foot. And similarly they needed quite some time to discover that there was some merit in the banks' arguments on the timing and impact of Basel 3.

But why, why does it have to take a year before this sort of insights sink in?

Eurocrisis: the frog may have been long boilt but we fail to notice...

Looking at todays market developments I am very much reminded by the complex discussions of 2007 and 2008. I think also these days, here in Europe we are failing to recognize that the political and decision process has gotten out of control. The bailout-frog is long boilt and dead, but we keep pretending it is alive and will be able to move. And heaven only knows wen reality will sink in.

Mind you, my personal opinion is that the Wednesday-package was not about bailing out Greece but about bailing out Europe. Given that clearly the EU governments don't have the support/cash to fund a bailout fund themselves, they had to provide the EFSF with sufficient flexibility to go shopping for funds in the market. Three cheers to Angela Merkel for finally understanding that...

And the European leaders of course also placed an emergency solution via the IMF in the background. In doing so the (emergency) plumbing is laid for a bailout of Europe. As a result, the financial markets could no longer determine whether the bazooka was sufficiently big. It's size is unknown, now that there is the possibility of some Chinese or Saudi Arabi or the IMF to step in. So, lot's of work to do, but the main problem was solved.

Thus, the essence of the EU-package was that it ensured that the EU itself would qualify for emergency packages, should push come to shove. And this appeared to work for a day or so. And while Draghi outlined to continue to take extra-ordinary measures, Italy got burnt in the market. So that did not bode too well.

And here we are now. Tuesday evening, first of november 2011. Berlusconi is meeting with his Cabinet to discuss measures. As is the Greek Prime Minister who presumably felt that the First November of 2011 was a good day to announce a referendum (1-11-11, it must mean something in Greek mythology). And of course, the Dutch Members of Parliament will also convene this evening. So there will be more discussions. And letters to parliament. And then our Prime Minister will say stuff. And then there will be the G20. And so on, and so on.

I understand that for those working in civil service, there is no giving up on Europe and procedure. They must continue to go the way that has been prescribed and try to make something out of this very desperate situation. But it is all quite similar to the myth/story of the boilt frog. If you put a frog in a glass of water it will jump out if it is heated quickly, but will not when the water is heated slowly. So in a situation of slow changes, the frog will boil to death.^* 

The whole EU-situation now reminds me very much of the complex discussions we had here in the Netherlands with the takeover of ABN AMRO by Barclays, followed by the bid of RBS/Fortis/Santander. This whole deal messed up incredibly and had all kinds of side effects (no attention paid to smaller banks with two of them failing subsequently: DSB Icesave). And the one major lesson that we could learn in the Netherlands was that it is essential to identify the moment in which a process has become too complex to handle.

And what I'm saying here: we may have passed that moment quite some months ago already. We are already witnessing the Lehman 2 moment in the markets, but European politicians are too busy to notice (as they are holding summits and meeting to prevent Lehman 2 from happening).


By the way: later scientists proved that the story was untrue and an urban myth. Maybe someday people will say the same of the Euro...

Interesting development... default Greece confirmed/rumoured (sort of) by Dutch Ministry of Finance..

This morning, Bert Bruggink, CFO Rabobank, was quoted in Financieele Dagblad, saying that -looking at the markets- it was not the question if but when Greece would default. And RTL Nieuws informed the public that the Ministry of Finance was now preparing for all possible (and unthinkable) options in the crisis. Which lead to clippings in the press: 'Dutch Ministry of Finance thinks that default of Greece is imminent.'

Tomorrow, Dutch parliament will discuss the EFSF in parliament. But PvdA (Labour) does not wish to support the extension of the fund if Finland still has its demand for collateral on the table. The 'Green-Left'-party states that with the extension, the EU should also decide on the Euro-commissioner for budget (the MarkRutte proposal). And the Socialist Party doesn't want the EFSF to take over bond-buying from the ECB as, the ECB has 'unlimited funds'.

Meanwhile, national radio bulletins send out the message that sources near to the Ministry of Finance outline that it is preparing for default (19.57). While formally the Ministry may not be calling for orderly default and denies it (20.20). Which means that the 'open' and transparant communication of Minister de Jager, once again creates more confusion than necessary. It's a bit like BNP formally denying the informal rumour about its financial health.

So, looking at this confusion, it does indeed look as if the default of Greece is imminent...

Eurocrisis: a clash of old (long term) and new (opportunistic) political thinking

These days I'm trying to get my head around the current developments in international and European markets and politics. There's a real flood of former politicians emphasizing that Europe is the solution, rather than the problem (see for example the statement by the Council for the Future of Europe). And here in the Netherlands we had former Prime Minister Wim Kok as well as former Minster of Finance Gerrit Zalm explaining to us on television that we need to remember the benefits of Europe and use it as a road to the solution. And I fully agree. As a whole, the eurozone is not doing so bad, but we do have a serious internal management and discipline problem.

Leadership today may be far more difficult than when the euro was formed..
Many commentators outline that now is the time to show leadership, based on a long term vision. And that is most certainly an important element of any solution. But I sense there may be more to it. There are some tectonic plates moving beneath todays politics. And the theory that I'm forming right now, is that most commentators are overlooking the movements of those plates as they are standing on those plates themselves (and incorrectly assume that they're not moving).

My theory is that, due to these slowly moving tectonic plates in the political environment, it might be much harder for todays leaders to exhibit the same leadership as their predecessors. So the solution to the eurocrisis is not just about leadership, but requires an appreciation of those fundamental trends as well.

What are the fundamental trends that now constrain our leaders?
The slowly moving 'tectonic plates' that constrain our leaders are:
1- a long period without war and a fading memory of bad economic circumstances,
2- a growing mastering of technology, leading to a shift in risk-sensitivity and a new control-perspective on the ability to control developments,
3- less religious attitudes, loss of self-discipline and focus on individual welfare,
4- electoral behaviour that is no longer focused on full political vision or ideology but can be seen as short-term shopping behaviour; the contract term of citizen and politicians decreased considerably,
5- the rise of the internet and social media, leading to increased scrutiny by the public, less margin for politicians to implement long term solutions and to oversimplification of complex problems in the public debate.

So what am I saying is: 
1- In Europe, we have forgotten how rich we really are and where we came from. So the financial and geopolitical benefits of Europe (income, peace and peace of mind) are taken for granted. And as we grow older, this individual and collective memory fades more and more.

2- The advancing technology incites a sense of control into the modern human being and people are less inclined to accept the limitations of life; we are used to demand more, get more, expect more, demand more and so on. The succes of technology also provides us with a sense that we can control more than we really can. And it shifts our risk-sensitivity. Risks that in former times were acceptable or considered an act of God, are now subject to preventive and containment measures, with the people seeking a culprit if insufficient measures were taken. Essentially technology makes us become spoilt brats that don't want to bite the sour apple for our health if there is a sweeter alternative around the corner.

3- The increased welfare and growing economy allow for the realization of many wishes. And the traditional religions slowly lose ground to an economic religion in which there is little place for self restraint or group thinking and solidarity.

4- In the political domain, the economization also occurs and voting becomes more an act like shopping than an act like determining which church/religion you wish to belong to. The lifelong committment to ideologies fades away and needs to make place for opportunistic electoral behaviour. In turn, the political parties need to focus more on short term issues and popularity to survive and represent the interest of their electorate.

5- Whereas in former times some leeway in government and politics could be created by controlling and restraining the flow of information, the rise of Internet and social media make it almost impossible to create time/intellectual room for debate/solutions. These media also allow for collective intelligence and feedback which is very much quicker than before. So politicians can no longer design political solutions which do not work in practice or contain design-errors. Similarly they cannot decide or choose open-ended solutions, hoping that some underlying fundamental problem will be solved by time rather than politics.

Thus, in order to solve the Eurocrisis, we don't just need leadership, but also:
- increased awareness about the benefits peace, peace of mind and economic growth that Europe has brought us and brings us,
- the ability to bite through a sour apple rather than postpone solutions,
- the awareness that we're in it together, even if it doesn't feel like that,
- politicians with the leadership to appeal to the publics desire for stability and growth and the fact that only with their prolonged loyalty can the public expect a better long term outcome,
- consistent solutions to the technical, financial and political issues at stake; any backdoor or design error will get back at us within a years time-frame.

See also the Dutch version of this post here.

How political opportunity helps dampen the economy

Today the Dutch Central Bank released its economic monitor. And that monitor warned that the good times are over. We are getting depressed again and growth will slow. See below the first signs of the downturn in dark blue:

It is quite clear to me that this time, it will be hard for politicians to blame the banks or anyone other than themselves. We know from research that bad news on financial markets and stock exchanges is affecting all the people in the public (although in the Netherlands only 1/16th is actually actively holding its own securities). And it is of course not more than fair to say that it is the clumsy and opportunistic behaviour of politicians with respect to budgets and eurocrisis that have significantly contributed to the turmoil in the market, this last half year. Add to this the fact that the politicians chose to also curtail all future economic growth by imposing taxes, buffers, liquidity traps and all that stuff onto banks.

So we are now back in the dried up markets, with depressed consumer outlooks with mainly the politicians to blame. Central banks are heavily overstepping their mandates to try and save the day but still we see no signs of true leadership in the Netherlands, Europe or the US. And somehow I have the impression that it may a take quite some time before our Dutch politicians will truly acknowledge that it was their own opportunistic behaviour that helped spark this crisis and slowdown/downturn.

Fed is moving the wrong way with announcement of longer period for low rates...

The full FOMC statement for August 9 says that “low rates of resource utilization and a subdued outlook for inflation over the medium run” warrant maintaining current rates until “at least” 2013. Although perhaps not surprising, it is not a smart thing to do. So many things can happen, among which feed-forward into an economic system that we do not really grasp. So why outline the policy goal now for such a long time?

My opinion is quite a bit based on the thoughts of Stephen Axelrod, a very senior policy expert of the FED. He explained (in this excellent book of his: Inside the Fed) that he thinks such a pre-announcement policy is not a wise thing to do (p 157).

In general I think it is best all around for officials to avoid commentary about the future of rates they cannot directly control or are unwilling to control - that is, rates other than the funds rate. I also think it is best to avoid commenting on the probable future of rates they do control. In either event, they taint the information being conveyed back to themselves and other market participants by the behavior of rates. Also, and more dangerously, because of misinterpretations and unintended consequences, they risk causing reactions in businesses' and individual's spending and borrowing decisions that make the underlying economic and also financial situation worse rather than better for the economy and its future.

In short, the future is unknowable both to the Fed and to the market. Little seems to be gained, and much can be lost in the terms of the chairman's and the Fed's credibility and policy effectiveness, by getting into the mug's game of exposing policy intentions and wishes that may be both misinterpreted and in the end, as market conditions change, misleading.

So in my opinion Bernanke is heading into very dangerous territory now.

Still amazed at the 'tough' stance of Netherlands Jan Cees de Jager in Greek Crisis

As the readers of this blog know already, here in the Netherlands we have a minority government that has to lean on support of the PVV to survive. With the end result that we have a divided caretaker government that steers on a day-to-day basis, and is unable to steer on long-term policy goals or to achieve fundamental changes.

As a result we see the current government and in particular our Minister of Finance, Jan Cees de Jager, surfing the waves of public sentiment rather than those of solid government. De Jager time and again has to account for the public sentiment and does so in particular with respect to todays political and macro-economic European crisis. He continues to stress that private entities will have to pay along to save Greece. And he says: there will be no more money going to Greece, unless this condition is fulfilled.

Well, this tough policy stance, copied from the Germans, is not bringing us in Europe or the Netherlands anywhere. All it does is prolong the crisis, as we have seen last week in all the market turbulence about Italy and the stress tresting of banks. So perhaps de Jager will slowly retreat. But still we can imagine some more populist talk to enter the European policy arena. Because the populist PVV is still banging the drum that no more money should go to Greece.

It is interesting to analyze the position of de Jager, using some of the insights of former President of the central bank: Nout Wellink. Just two weeks ago, on the day of his departure from the central bank, a book was published with the title 'Wellink talking'. And in it Wellink outlines that at some point in time, bad collateral of banks may result in losses for the ECB and thus also hit the Dutch tax payer. It is telling and striking that only very few people in the Netherlands realize that our 'tough talk' with respect to the Greek situation is just for show. The real costs of this crisis may well end up at the Dutch tax payer via the back door of the ECB.

Although by now I should have gotten used to the 'pragmatic', visionless way in which our government operates, I still remain amazed at the Ostrich policy that our Ministry of Finance uses in dealing with the EU-crisis. If indeed at some point in time the central banks or bankers were to blame for a crisis, now is the time that we can fully blame politicians for not deciding, for bowing towards populists and for a complete lack of leadership.

Greece: let's help the Greek people in solving the democratic errors that caused the financial trouble!

In an earlier post, I outlined that both the EU-countries and Greece were sort of stuck with politicians that may have not done their job well. Populist politicians in the EU have widened the gap with Greece by portraying all the Greek as bandits. Meanwhile, within Greece there is a huge difference between have's and have-nots and between politicians and the people. So while the world may treat Greece as one people, we overlook the distinctions within the Greek people.

ZeroHedge featured an article that made this distinction more specific. The article outlines that Greece may essentially be a kleptocracy. In such a system, a financial and political Elite skims and concentrates the wealth of the nation via corruption and embezzlement while being protected by the winking complicity of their fellow plunderers who hold civil and financial authority.

At present all eyes are focused on Greece and the votes in parliament. While most eyes will focus on the financial part of the vote, I am thinking now about the ramifications for Greece as a democracy and its citizenry. Imagine yourself to be a Greek voter that has over time learnt to live with corruption and the fact that an elite holds the jobs and priviliges. In this role you are essentially illegally taxed by the elite, in order to get services from the state that it should provide you for free or at much lower costs. And now this elite has also frauded the European system so much, that it is obliged to introduce a formal tax upon you as well. This double-taxing appears to be quite unfair and incorrect. And what can you do about it?

The current workings of the Greek democracy will thus inevitably lead to further social unrest than we see already. The people will want to rise up against their political elite in a similar way that in the Middle-East countries we see the people rise against its dictators and their family-clans. And that's what we see in the streets now. It's the same process, but the Greek elite is less pronounced, leass easy to catch and less easy to portray as a single entity.

I am afraid that the EU people and politicians will be so much clouded by their economic mindset and reasoning, that they will misstake and portray the Greek people's resistance as inappropriate given the amount of fraud that has occurred so far in Greek government (the elite). This may lead EU leaders and politicians to explicitly or implicitly favour a violent suppression of completely justified Greek protests.

In my opinion, our attention in the EU should not just be focused on the financial issue. We should take a broader perspective and try to determine how we can help the Greek public get a government with less corruption and less implicit taxes, allowing them to pay the formal taxes that Greece needs to come out of the crisis.

The stakes are high. And not just financially. If we overlook this issue, then essentially we are supporting the dictatorship of the Greek political elite.

And is that something we want the European Union to be based on?


Click here for a Dutch translation of this blogposting.

Appointing the new President and two directors of our central bank: butterfingered fiddling with an aftertaste of sprouts...

Well, the dust has now settled in the Netherlands on the announcements with respect to the new President and directors of our central bank: De Nederlandsche Bank (DNB). It is clear that our Minister of Finance, de Jager, has appointed one of his own top-managers, Klaas Knot, as the next President of DNB, to succeed Nout Wellink. And Jan Sijbrand (former NIBC and ABN AMRO), is to become the Executive Director in charge of Supervision. And as a result of the clumsy process, one of the internal DNB-candidates, Lex Hoogduin, who was proposed/favoured by the Supervisory Board, drew his conclusions and decided to leave. So what we can also read in the press release of DNB is that a third new appointment is announced: that of Frank Eldersohn, who will be Executive Director in charge of the 'internal operations'; the day to day functioning in organisational/HR terms.

Let's review this appointment process from a distance, drawing on the numerous reports and bits of work that are available with respect to the functioning of DNB, AFM and financial supervision.

First some colours in the background
Traditionally, both DNB and the Authority Financial Markets (AFM) were given quite some leeway in how they organised their business and executed their constitutional supervisory roles. The consequence was that the AFM developed a policeman-style under Chairman Arthur Dokters van Leeuwen. His successor, Hans Hoogervorst, combined this approach with a political savyness and unnecessary PR-agressiveness. Hoogervorst used publicity incidents to hurt banks in their image and bashed the banks into his prescription: an academic frame-of-mind in which consumers are rational, yet deserve paternalistic protection from overcrediting and in which any form of kick-back is to be eliminated in the marketplace. I am afraid that the AFM is going to need quite some years to discover that they were wrong in assuming the consumer rationality and that they will in the end discover that the elimination of kick-backs means that financial advice for consumers has become far too expensive (and thus: out of reach) for the consumers. So through enforcement of their academic yoke, they will eventually make financial advice more costly, cumbersome and less available to the public at large. Similarly, we will find out in about 5 years -when the market has come to a complete standstill- that they have been beating to loud on the mortgages drum.

Now for DNB. While the AFM is noisily supervising the banks, DNB kept up their appearences in their old-fashioned supervisory stile in which banks are invited over for a cup of tea to discuss business. Whereas AFM was showing too much teeth, DNB showed too little. And that had an effect on the cooperation between the policing AFM and the ever-so-polite DNB. And then DNB got traumatized in 2006, by the failure of Bank van der Hoop. From that moment on, all things in DNB-life became legal. External advisors advised on each step of supervision, thus paralyzing DNB. DNB became afraid to move at all and also got stuck under the spell of Wellink. Wellink was in the Board since 1983 and had arrived at his second 7-year term. Which is impractical, as it is impossible to organise the required internal criticism and openness for such a long period. It just doesn't work as we can see from the examples of Kohl, Thatcher and Lubbers. As a consequence, the oil-tanker DNB was not able to respond promptly and properly in discussions on the ABN AMRO take-over, the failing of Icesave and the demise of DSB. Our readers should note however that it is not so helpful for the central bank to be surrounded by inconsistent and populist claptrap on complex banking issues. But that's all part of the game, so as a President you have to be able to handle that as well.

Our Ministry of Finance meanwhile lacked all vision on how to organise financial supervision. And I know this sounds harsh and crude, but it is a simple fact. Our independent Court of Auditors reported their amazement about the fact and the response of our Ministry was: our supervisory policy is embedded in the Law on Financial Supervision (WFT in Dutch). Well, the connoisseurs of that law will shrug their shoulders, smiling politely. Because the WFT is a beautiful, idealistic legal project that had the potentially to become a great legal structure for the financial sector, also through the nuanced use of open standards. In practice, however, every chapter of the WFT-law was introduced in a hurry so at present there is literally no understanding it any more. If we would consider the WFT to be a computer-application, it would be immediately classified as a spaghetti-bomb and a threat to business-continuity, requiring a comprehensive revamp and structural re-engineering.

Equally important is the fact that in the late nineties the internal organization of Finance was overturned. While the former Ministry would have a department dealing with the financial sector as such, the new departments were split up on the basis of regulatory aspects such as: stability, market conduct, generally and so on. This led to less visibility and understanding of the impact of legislative changes for the sector as such. Thus, the sector was facing a Ministry that looked like a conveyor belt pushing out partial amendments.

Change, but how?
It is clear that the above institutional and supervisory framework is not sufficiently apt to deal with large market shocks and changes. And it is not surprising that the various players in the field reflected on the best way forward. So there were reports of what had happened on DNB's supervision (report Scheltema). Politicians came up with an examination (de Wit), largely a rehashing of international reports. The banks founded a Maas Committee that emphasized in the final report the importance of good governance, stronger risk management and a more integrated assessment of societal interests. And the Ministry of Finance started thinking about a supervisory policy version 0.1 or 1.0.

What surprised me was how the discussion on the desired culture-change at DNB took place. This followed from the report Scheltema, but everyone could know that for such a change to have effect, it is necessary to embed it in a good institutional structure and to be supported and spearheaded by a good leader: the President himself. I looked with increasing astonishment at the senseless rush that was displayed by all actors in the play. Within one month an implementation plan for cultural change should be made. And while DNB met this request of parliament without complaint, it goes without saying that this will have absolutely no effect whatsoever. Because the President, spearheading the change, was going to be replaced in a years time.

While in the Netherlands we were discussing and pondering the above, our Government fell apart in February 2010, which meant that no ravishing or fundamental changes could be expected. Still, it appeared that our Ministry of Finance had decided that their links to supervisors AFM and DNB should be strengthened. So they colluded with Members of Parliament to obtain the discretion to guide and demand action from supervisors (without the realization that the WFT does not really allow them such an action). Furthermore, the Minister of Finance quickly said he was changing the appointment rules for Presidents to a maximum of one re-election. In doing so he inelegantly and unnecessarily bruised Wellink. And our Minister became more responsible for the succession planning at DNB, which requires a forward-looking approach.

The appointment process of the President and directors of the Dutch central bank (DNB)
What I noticed last year is that the tone of voice and the noise-level of publicity by the AFM appeared to decrease, already while Hoogervorst was still running the AFM. The penalties for banks were lower and the public reactions of banks with respect to the behavior of the AFM were milder. Hoogervorst was sent on (or perhaps: off) to his beloved international work. And at the same time the Ministry of Finance appointed his Treasurer, Ronald Gerritsen as the new Chairman at the AFM. Which brings the Ministry of Finance closer to the fire. 

As for DNB, there is of course the weekly lunch-meeting de Jager and Wellink. I imagine that early-on they discussed how to organise the succession. And it must have been obvious that Hoogduin was the intended successor, as such a preference (of the Supervisory Board) doesn’t suddenly fall from a blue sky down. Yet, both Wellink and De Jager will have noted that Hoogduin had little track record in Bank Supervision. And my idea is that the Ministry of Finance proposed a division of responsibilities between supervisory and monetary policy, so that Hoogduin could be appointed as new president of DNB. And that part of the succession planning proceeded nicely: Parliament agreed with the idea and we moved on.

But then, in May things suddenly went wrong. The discussion on succession hit the streets, the public and parliament. This surprised me, but also allowed me a moment to share my views on my preference. But the Members of Parliament did not want Hoogduin to be the next DNB-President as he was no outsider and could thus not be the one to spearhead the culture change at DNB. And then, one of the three candidates, Kremers, also stepped out of the race. To him, the Supervisory Board of DNB was unable to outline clearly what his position would be (no doubt this was a discussion on the relationship between the President and the almost independent director of Bank Supervision at the DNB).

What struck me was that we were very much running out of time. It was May, while we needed a President as of July. And you don’t want to be choosing your next central bank President in such a time-squeeze (it seems that shows such as Idols and X-factor even use more time to pick their winner). Anyway, we went through somewhat indistinct and misty weeks, to find out that one of the other top officials of Finance, Knot (who has a DNB-ring to him as he worked their for many years) will become our next President at DNB. With former Crown-prince Hoogduin choosing to leave, because he undoubtedly envisaged his future to be different than it now had become.

The net effect of all this fiddling: there are suddenly two new directors and a new President at DNB as of July 1, 2011. And do note that Klaas Knot is not really an outsider. He originally worked for the Insurance Supervisor and had a quick career at DNB for some 10 years. He became the right-hand advisor of Wellink in his international meetings/work. And a number of years ago he was appointed as a top-civil servant at the Ministry of Finance, possibly as part of a master plan in which Wellink arranged his long-term succession (or simply just took good care of the career of his closest advisor). Now, with the butterfingered public discussion on the succession and role of Hoogduin underway, the choice for Klaas Knot was advanced in time (he might have been on the schedule to succeed Hoogduin). And my guess is that the lack of enthousiasm of Knot for internal and organisational matters may have led him to outline that he didn’t wish to take up the ‘internal affairs’ portfolio of Hoogduin as a part of his role of President.

What struck me is that perhaps Kees van Dijkhuizen and Nout Wellink may have still played important roles behind the curtains. The new director supervision of DNB is currently working for NIBC, (the same bank where van Dijkhuizen is CFO). So both Wellink and van Dijkhuizen, may have each supported their trusted candidates/protegees in view of their qualities. And those qualities certainly do not need to be questioned as the competences of both Knot and Sijbrand speak for themselves.

What I do have a concern about, is that the new management at DNB may get a structure that was focused on the old idea of Hoogduin as the new President. And there now is a separation of the domain of internal affairs and organisation (Eldersohn), Bank Supervision (Sijbrand) and general management and monetary affairs (the President). If the DNB-improvement for the future lies in a cultural change, it is clear that this requires leadership from the future President. But that President is not directly responsible; his two Directors are. And that is a rather unfortunate organizational setting. Furthermore, Knot may not be willing to tighten the knots for his old colleagues when doing the cultural/organisation change. Nevertheless, with sufficient quality, coordination and perhaps a good fresh breeze in the organisation as a result of the new Director Supervision, we should just hope for the best.

Incidentally, I should also mention that the Supervisory Board has not made any statement at all. It appears to me that the unhealthy intervention of the Ministry of Finance with respect to the succession of the President (not a minor job) does not bode well for the future. And this is the same Ministry that formally provides the Supervisory Board with very strong powers in the future. In my view, it is strange to have a Ministry doing your job as the Supervisory Board, so I am amazed that none of them respond or resign. It’s a stunning silence that we can witness, which seems to imply that the Supervisory Board Members rather stick to the status and prestige of being the DNB-Supervisory Board Member than to the content of their job: ensure proper governance at DNB.

Conclusion: butterfingered fiddling with an aftertaste of sprouts...
If we look at the importance of proper supervision and a good central bank in a country, we must realize that DNB is a central element of the most vital (financial) infrastructure in the Netherlands. And that means we must do our utmost best to maintain this infrastructure and to ensure that is and will be functioning properly. I am therefore quite surprised about:
- the lack of debate on financial supervision and resulting institutional structure (the right for a Minister to mandate specific action to the Supervisor is absolutely undesirable),
- the faulty structure imposed on DNB (the split of responsibilities between supervisory director and president, the unworkable role for the Supervisory Board)
- the stunning silence that from the Supervisory Board, now that their preferred candidate has not been chosen and decided to leave,
- the outright poor planning, timing and limited secrecy surrounding the reappointment process. The fact that the process became public domain didn’t do anyone good and was quite awkward to observe, leaving some of the people involved with a bit of a stain on their image.

We can conclude that we have now effectively already built in the core structural weaknesses that will give rise to future incidents with respect to DNB and Bank Supervision. It's all quite embarassing given that the essence of government is planning and designing ahead in order to prevent incidents and structural weaknesses, rather than to ensure them.

For now I am left with a sense of shame about how we have executed this succession planning process in the Netherlands. If my English vocabulary and Google Translate are correct I could qualify this as a major bit of butterfingered fiddling that leaves an aftertaste of our beloved Dutch sprouts. It makes me realize that the Netherlands is too small in size and population to be able to achieve the proper professional levels necessary that suit a mature democracy and financial market. That is a bit depressing, but that’s the way it is.

Of course the biggest role of the Netherlands in the financial world stems from the Golden Age. And since then we were in decline until former President Vissering lifted us up by his international stature and authority. Similarly, Duisenberg was special and President Wellink has done an incredible good job (although in the end hindered by a monoculture within his own organization). But alas, if we continue conducting ourselves the way we have been doing recently, we can be certain to slide away into a pragmatist way of doing that certainly does not justify a place at the international financial conference tables.

With only ourselves to blame for that.

Will history repeat itself....?

One of these days I was wondering if we weren't heading towards a similar situation as in the run-up to the crisis. A prolongued period of low interest rates. Asset bubbles. Tech-stock and IPO's all over the place. And so on. And I recalled that one of the earlier FSF-reports had some good lines on that matter. The Report on Market and Institutional Resilience in April 2008 noted:

The turmoil in the most advanced financial markets that started in the summer of 2007 was the culmination of an exceptional boom in credit growth and leverage in the financial system. This boom was fed by a long period of benign economic and financial conditions, including historically low real interest rates and abundant liquidity, which increased the amount of risk and leverage that borrowers, investors and intermediaries were willing to take on, and by a wave of financial innovation, which expanded the system’s capacity to generate credit assets and leverage but outpaced its capacity to manage the associated risks.

What I found interesting in the aftermath of the report and its follow up, is that most attention focused on what banks, supervisors could do, but that central banks were kept out of the discussion and follow up. While the man in the street started taking up all the technical discussions in the report (on perverse renumeration inventives, capital buffers, securitisation that got out of hand, US housing market deficiencies), the role of central banks never made it to the spotlight of political discussion. Yet, it is clear that the central banks, providing easy money, played a very important part (as recognized by the words: including historically low interest rates).

And now, three years down the line, we have all fastened seatbelts with all kinds of regulations for banks, against short selling, increased buffers for Basel, risk tax for systemic institutions, new liquidity frameworks, harsher credit rating agencies and so on. But central banks maintain low policy rates that got us here in the first place.... so that makes me wonder: will history repeat itself?

We will soon find out.

Trichet now being careful not to raise the interest rate

Last week we could witness the first press conference of Bernanke, highlighting the thoughts behind the FOMC decision to not raise the interest rate (in this pre-election year). Todays unemployment data may have already been at their table, who knows. Yet our attention was focused in Trichet and the press-conference. And we could note that the questions on this side of the ocean were better. Yet the answers by Trichet were of a different kind than those of Bernanke. Where Bernanke would be getting back on the technical/economical picture and monetary arguments themselves, Trichet very clearly sticks to what he can say and what he must say. He's quite the diplomat, so every word counts.

Essentially, the ECB has decided to not further increase the interest rate and take a wait and see approach. This has to do with most recent figures on retail sales in EU, which weren't really positive. So the ECB will maintain its current stance and will also continue to note that the non-standard measures of monetary policy are clearly temporary (a frase being used so long now, that it starts to wear off and may now become a nice one-liner for future references to situations where politically one has to defend a policy line that legally can't be upheld).

What was remarkable, was that the ECB (having had a meeting with all EU-member states and the EU-commissioner present) was very clear as to the need for debt-laden countries to comply with all agreed measures. He also outlined utterly clear that there would be no writedowns of Greek debt. None whatsoever. So while the last couple of times, Trichet had toned down a bit on his political 'rants' he was now fully back and armed. He was also quite clear as the importance of preventing second round inflation effects. And perhaps he hoped that if he spoke about it clear enough, the effect might not start to occur...

A question by a reporter about how Trichet evaluated the Bernanke-press conference, was of course left unanswered by Trichet. Yet, I guess he had anticipated the question with his press-people, in order to convey a message to the markets. He used the question to explicitly outline that he fully agreed with both Geithner and Bernanke as to the preference and importance attached to maintaining a stable currency exchange rate. And somewhere in the press conference he also spoke about the intricate web of central bankers.

Having witnessed this central-banking-web close by, and appreciating the diplomatic skills of Trichet, there must have been some phone calls between Bernanke and Trichet. I image a call like this:
B: So you;re not going to raise either?
T: I can't tell you of course, we haven't decided yet, but it appears unlikely to me..
B: Ah... well, then, that's good news
T: Tell me, cher-ami,  how do you mean?
B: Well, markets may expect more from ECB than you give now, so the euro will slide and I will get the press of my back with their comments as to me, talking the dollar down...
T: Ah, I see, well, if that's your concern I'll see if I can hint a bit around during the Q&A session
B: Ah, Jean-Claude, well, this is all hypothetical of course, as you haven't decided anything
T: No, indeed, but as always I have enjoyed sharing our views on the matter.
B: Same here.  Speak to you later
T: Yes, bye bye.

The results of both the press conference and the statements by Trichet speak for themselves. Euro quite a bit lower and everyone now anxiously awaiting tomorrows US-data. Which in my personal view will show that the recovery is not taking off in the US (as it isn't in the EU). Which leaves the stock markets very overvalued and create a dim economic 'muddle-through' perspective. Where some  potential for economic growth is left unutilized due to the political choice to increase internal buffers at banks and to force banks into low-risk (thus low-lending) profiles. Which leaves us open to further shopping and take-over by other parts of the world with a bit more cash at hand..

Click here for the Dutch version of this blog-item.

Latest news on successor for Wellink; candidate Kremers no longer available..

The last couple of weeks, we witnessed an interesting public debate on the question which candidate would be the best to be the successor to President Wellink of the Dutch central bank (DNB). Where at first we expected a silent appointment by government, on the basis of a list of three candidates, last week the debate came out in the open, thanks to the Financieele Dagblad. After which the Minister of Finance and a number of politicians hurried to outline that there would not be a choice on the basis of political background.

Today, the Financieele Dagblad once again stirs the debate by announcing the news that one of the candidates Kremers, has withdrawn from the race for President. If I try to guess why I can only come up with two reasons. One is a sense of personal pride, where Kremers perhaps feels so superior that the idea that he is not the number 1 candidate, is unbearable to him. And rather than awaiting the outcome of the race he steps down, so that until eternity he can claim: 'I was in the race to become President of DNB but declined in order for government to be able to solve the issue'. But there is also a second/third option and that is that he has got another offer on the table, which he accepted. And that offer could either be from DNB/Ministry of Finance (and constitute an appointment as Director for Bank Supervision) or from his own bank (getting more money or a different role or stuff like that).

So now the race for President is between Hoogduin en van Dijkhuizen. But we must not overlook the silent game of DNB in this. That might be a game of time and pragmatism. Because, if the government decides at the end of May that van Dijkhuizen is the man, van Dijkhuizen only has one month left to leave his current job and start his new job on July 1. So every kind of delay might be an advantage to the insider candidate. And that might be the silent strategy by DNB. We just don't know.

The only thing we do know: To be continued.

PS. And the next part of the sequel occurred this very afternoon. Wellink has indicated on a conference that he was certain that the new Director Supervision would be an outsider. So that means more possibility that we will end up with Kremers to be appointed in that role.

Bernanke sticks to low rates.... risky... but understandable

These days I watched and listened the first press conference by Ben Bernanke, in which he elaborated on the US-FOMC monetary policy. After a nervous start, he started getting the hang of it when it all became 'technical'. Whereas Trichet is a fully certified clueless-empty-can-but-very-capable-regent who brushes off all complicated questions with a number of standard mantras, Bernanke was in good shape. The guy very obviously knows what he is talking about and that is a huge relief in comparison to Trichet. I noticed that in general, also the US-FED-watchers shared the view that this was a good first premiere by Bernanke (see also here).

Wat Bernanke told us, is that the FOMC, with its double mandate on price stability and employment, chose to prioritize the economic growth and employment by maintaining low interest rates for the time being. The quantitative easing will end in June, but there will be reinvestments of matured bonds. The Fed considers a stop on this reinvesting as a tightening of monetary policy and will only do so after due consideration and on the basis of an explicit FOMC decision. So, for now, we will face a prolongued period (at least three months) of low interest rates in the US. Employment is the main thing.

The market effects were quickly visible with a happy stock market and a diving dollar. Meanwhile I was pondering the thought if the economy in the US would really be in such a bad shape that it deserved further easy-money? Or could there be another angle at all this?

I realised that we are in the run up to new elections and recalled literature from a while ago: research by the FED that observed a correlation between the behaviour of the FED/FOMC and the pre-election year. This would be either an explicit or implicit case of the principal-agent situation. Meaning that in the year before the elections, the US Presidents appreciates a solid economy which then creates jobs that he can show off with in the election year. And from that perspective, the FED-decision is quite clear (and a case in point).

Still, this is playing with fire, as we are in the same situation that brought us the financial crisis: a prolongued perod with low interest rates, which may seduce markets into taking too much risk. Which may lead to the situation where we get rid of the hangover by taking a new beer, the day after (as we all know, the recipe for die-hard alcoholism). En also our central bank (De Nederlandsche Bank NV) states a serious warning in its financial stability report which does not sound happy at all:
Just as in the run-up to the crisis, we can observe overliquidity in the worldwide financial system, with global imbalances. These developments may, in the medium term, threathen the financial stability, when once again bubbles in financial markets or unsustainable debts will come into being. We have almost stretched the accomodative monetary policies that we see worldwide, to their maximum limits.

In sum, the historic days are not over yet. As we are very much aware how we came into this crisis, it remains a risky approach to stick to low interest rate policies. Time will tell.

Trouble in The Hague and Amsterdam: Ministry of Finance does not favour Hoogduin as DNB-President...

In the Netherlands we are looking forward to hearing from our government who the next president of the Central Bank will be. You know my personal opinion and preference voor van Dijkhuizen as the next President. And this morning the Financieele Dagblad outlined that he is one step closer as it appears that the Ministry of Finance has a strong preference for an outsider candidate rather than the candidate Hoogduin, preferred by DNB itself. Het Ministry thinks that this is necessary to ensure that DNB will effectively change its culture and does not believe that an internal candidate can do this.

Now that the Ministry of Finance doesn't rubberstamp the proposal of DNB (which they used to do until now), the official decision by the Dutch Cabinet has been delayed a couple of times. And the Financieele Dagblad notes a couple of arguments, among which the political colour of candidates, as possible reasons. But we don't get the full picture, as there is also a candidacy for the role of Executive Director Bank Supervision. But we don't hear anything about that appointment procedure.

I have been pondering the continuation of this sequel. I wouldn't be surprised if a new solution to the problem surfaces in which the executive director on Bank Supervision is also named: vice-President of DNB. In that model Hoogduin would be promoted to President and remain the monetary expert he is, while the real weight rests with the Vice-President, responsible for Supervision.

We'll soon discover how this ends: I am most curious!

PS 1: Dow Jones reported this morning that Ministry of Finance, De Jager, has reacted that the political colour of the candidate does not play any role:
'I haven't seen a final list of candidates' according to the CDA-Minister. Hij continues to outline that he is not in a hurry, because: 'we still have until June'.


PS2. The PVV has explicitly noted that they wish the successor for Wellink to be an outsider, in order to change the DNB-culture properly.

The successor to Wellink: why I think van Dijkhuizen is the best for the job !

These days, decisions are in the making about the best man to succeed Wellink as the President of De Nederlandsche Bank (our central bank). There are three candidates for the job: Hoogduin, Kremers, en van Dijkhuizen. Whereas in former days, the President used to be responsible for both monetary and supervisory matters, the Minister of Finance, JanCees de Jager, is now choosing for a separation of duties (see here Dutch source 1 and here Dutch source 2). Due to the failures in Dutch banking supervision of the last years, there will be a separate executive director responsible for bank supervision. That director can independently judge and committ the whole central bank board (and its President). And as to the general set-up for bank supervision in the Netherlands, I am amazed at the following statement of the Ministry of Finance:

The Minister trusts very strongly on the internal systems of checks and balances of De Nederlandsche Bank (DNB) and the Authority for Financial Markets (AFM). Both supervisors are themselves responsible for the proper functioning of their internal governance, the legality of their expenditure, the execution of supervision and the determination of priorities and accents of their work.

I find the above quote highly interesting and surprising because things haven't gone that well at the two Dutch supervisors of financial institutions. Too much money has been billed to the institutions under supervision, which had to be corrected by the administrative judge in an appeal (while the Ministry of Finance and supervisors for years ignored the complaints of representative organisation that highlighted this excessive billing). Three banks have failed, not the least as the result of a strong monoculture at the prudential supervisor, DNB. And the AFM has shot bullets as well as blanks by using open norms on anything that moved. So with a Ministry of Finance that doesn't change any of this and just trusts those supervisors to continue doing their job well, we don't have to wonder why the Netherlands will be quite likely to soon face another financial crisis or failing bank. Perhaps the only positive thing that we can say for the Ministry of Finance is that at last, they have formulated some sort of vison on supervision 0.1, because so far it was the only Ministry in the Government that hadn't done its homework properly.

Yet,it might also be the case that the Ministry does not aim to steer policies by a proper structure, but by manning the supervisors with the proper President. It might be this choice that underlies the choice of the Ministry for Ronald Gerritsen, currenty it's own secretary-general, for the role of President of the Authority for Financial Markets (AFM). And similarly one might expect a choice for Kees van Dijkhuizen (former Treasury of the State, just as Wellink was), for the new boss at DNB. But let's not rush too much with my personal preference.

Apart from all the above, we have to be aware of the challenges for the successor of Wellink. The first one is that he (a she could not be found apparently) needs to work with an impossible governance structure in which a pigheaded Director of Supervision can committ the whole DNB-board without consulting them in advance. Second of all, the new President needs to be someone who is able to change the internal culture at DNB from a Kings-Court attitude to more street-wisdom. it must be someone that not just thinks, or prefers study of legal implications, but is also able and willing to act. So we are looking for a pro-active and inspiring leader, with sufficient political flexibility and insight.

Looking at the candidates it is obvious that not all of them are known to the public. Hoogduin, is an abstract macro-economic expert and doing very well in that role. But it is also clear that the analytical approach isn't suited to the public and staff: it's not the man to inspire staff with a warm / human vision and he appears to be less able in communicating simple messages to the public at large. In his way of work he is thus quite likely to condense problems into a set of mathematical equations of an economic logic, which dictate the outcome in the long run. Finally it is unknown whether his political antenna is sufficiently well tuned. 

Kremers is the architect of the current supervisory (Twin Peaks) system. After his job at the Ministry of Finance (in the nineties), he joined IMF. From there he congratulated the Ministry with te well chosen twin peaks regulatory system. In fact, he thus complimented himself over a distance and this was quite embarrassing to watch. It is unclear what job he holds exactly at RBS, after the merger. He does fit the criterion however, that he used to work at the Ministry of Finance worked. And he will also be politcially versatile, though lacking in hands-on experience. He seems too self-involved in his mental ideas and recipes. Placing him in the chair of President of DNB, means that DNB gets a new version of a mastermind at the top who has an audience bowing for his great thoughts. It is exactly this symbiotic groupthink relationship between Wellink and his staff that needs to be changed and with Kremers, it seems unlikely that his unhealthy relationship between leader / staff will change. So Kremers is not the right candidate, although many may say he is the right man because of the increasing importance of avoiding systemic risk (and relationship with the IMF).

Finally, Kees van Dijkhuizen. He worked as the Dutch Treasurer and then at NIBC, which wasn't the most obvious choice as it was a bank in special circumstances and trouble (takeover by Kaupthing didn't succeed so NIBC is still in the hands of a a consortium of JC Flowers). He actually worked there in silence, introduced a new consumer savings account (NIBC Direct), to broaden its funding, and made some steps into expansion abroad. All are quite healthy and logical steps, and what appeals to me in this is the hands-on nature. Dijkhuizen, then, is the only candidate that demontrates his ability in hands-on management in both public and private sector, surrounded by complex political, macroeconomic and market dynamics. It seems to me that the richness and diversity of qualities you need to succeed as he does, are precisely the qualities that we require of the new president of DNB.

Henceforth my sincere advice and conclusion: van Dijkhuizen is the best man for the job!

Eurocrisis part 3: brace for impact....?

Now that we entered the new decennium, we're still faced with some financing problems in the EU. This weeks auctions for government bonds of EU Member States are all in the news and the ECB keeps on repeating their mantra that they're only there for the small work (buying bonds as long as markets believe that that helps...) and that politicians are the only ones who can really face/solve the eurocrisis. So where do we stand with the political solution?

Essentially there is a deafening silence. China and Japan sooth the markets and EU by stating that they're ready to step in to buy EU bonds, but is that the solution that any politician would favour?

Basically all politicians are still fighting some old wars with partial solutions:
- focusing on limiting bonuses
- going for basel 3 and enhancements
- throwing in countercyclical buffers
- ensuring extra levys on banks with systemic risks
- making sure bond holders pay also when a bank fails.

The impact of the sum of the above political solutions on the market as a whole or on niches in the market is however unknown, less well understood but it remains in the end what matters. So what happens now is that politicians are steering the financial markets by looking in the rear view mirror and on ocassion some 5 working days ahead. They're putting the ECB in an awkward half political position and forcing the ECB to step out of its mandate to correct their own passiveness and ineffective behaviour.

We can only brace for impact now and hope that indeed there is some economic recovery that helps us in Europe out of the dip so that we can organise soft solutions in the coming years rather than make tough decisions right now. Yet, if politicians maintain their course on stiff and rigid rules for banks, there's not a lot of leeway and perspective on generating economic recovery and getting rid of the eurocrisis at all.

EU politicians essentially have to choose. If they want to save the euro, they need to postpone the international measures for banks just as many years as the US postponed introducing Basel 2. If they want both, they're ending up with badly financed EU-Member States, low revenue generating banks, no economic growth and a sell out of industries as well as EU-bonds to China.

My personal preference would be to postpone the generic scapegoating for banks so that they can be of help to recover from the crisis. Because right now politicians in Europe are really overshooting the post-crisis measures for banks in Europe, while undershooting the required measures for sustainable government finances. Which means that they are working towards creating a future where Europe is a museum with a lot of Chinese and Arab visitors.

UPDATE THURSDAY 13-morning: Apparantly the Spanish auction went well and there's relief all over the place. Also the Dutch Finance Minister announced that IMF may contribute to the EFSF fund some more. So there must be a lot of movement behind the screens to resolve the crisis. As for the amount to add to the fund... see the estimation of citigroup below:





UPDATE THURSDAY 13-afternoon: At the ECB press conference Q&A session this afternoon Trichet clearly outlines, in strong words that the ECB has delivered and will deliver its goal in Europe. He stresses that in fact it is up to the politicians to deliver the E of the EMU (stressing that he is delivering on the M). And he outlines that he finds the stability fund should be increased in terms of volume and use (quantity and quality).

Eurocrisis: elegant compromise to soften relations between EU and Ireland

I am just listening to the EU press conference of the Eurogroup. I was unable to fully listen to the start of the conference, but what I understand is that all parties involved stand ready to help out Ireland with their banking sector problem. And there would be short and intensive consultation on technical isses. In this way a compromise is reached between the stubborn Irish position (we don't want help as a government) and the EU Commission and ECB concerns (we need to help the Irish out, because their situation may become unsustainable).

Juncker says now: it's up to the Irish. We will help as the Eurogroup to be supportive. As far as the programma and consultations is concerned, the meetings will be with ECB, EC and IMF, so the Eurogroup will not be involved. There's even some humour between Juncker and Rehn now (in the treaty we trust - but the devil is in the details). Still the Commission will not disclose a specific amount of money/support that is considered.

Earlier in the conference, the EFSF boss outlined that he can raise funding in a couple of days. And he noted that there was considerable interest from Asian countries. So the Asians stand ready to help the Irish.