Thursday, 6 October 2011

Let Go Of The Rising Balloon

I recall being told the terrible story of some military personnel grabbing the ties on a hot air balloon that was threatening to leave the ground prematurely, only to be hauled into the air. One by one they faced the decision whether to drop off as it continued to rise, and some held on too long... I'm tempted to search for an accompanying YouTube clip. But you get the point, and Winnie the Pooh provides a more fitting illustration for the Eurozone politicians who face the same dilemma.

The latest proposal is that a €440bn European Financial Stability Fund be somehow swelled to €1 trillion, which in turn would be leveraged to €4 trillion using "distressed sovereign debt, and equity in distressed banks exposed to the very same sovereigns, as security".

That this is the equivalent of a rising balloon is not in doubt. Nor is it a surprise. Gillian Tett explained two years ago why sovereign debt could be "the new subprime". And the IMF's report on the subprime crisis has explained the problem with allowing the same $1 trillion in assets to be rehypothecated or 'churned' to 'secure' $4 trillion in borrowing by US banks in the lead up to the Lehman collapse... Noting the "surreal" circularity involved in the latest EU proposal, Satyajit Das also recently pointed out that the proposed structure is also flawed because it fails to recognise that the underlying bonds could lose 75% of their face value.

Martin Woolf discusses this process in terms of "How to keep the euro on the road" but I prefer the rising balloon analogy - as did Danny, the dealer in Withnail and I, when referring to the end of the '60s:
"Politics, man. If you're hanging onto a rising balloon, you're presented with a difficult decision - let go before it's too late or hang on and keep getting higher, posing the question: how long can you keep a grip on the rope? They're selling hippie wigs in Woolworths, man. The greatest decade in the history of mankind is over. And as Presuming Ed here has so consistently pointed out, we have failed to paint it black."
Time to let go. Greece first.

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