'Emergency' Invites Draconian Measures

In what the Atlantic magazine called 'one of  Europe's dumbest moves yet', the euro-group finance ministers apparently let it be known via leaks what kind of contingency 'emergency measures' they are considering to implement in the event of a Greek exit from the euro area.

We are actually glad this has come out into the open, as this demonstrates the enormous price citizens are likely to pay in the end if the ongoing bailout charade fails. As always, a perceived emergency is getting to the point where it is ever more likely that it will be used as an opportunity to severely limit individual liberties and in this particular case interfere massively with peoples' property rights to boot – all 'for their own good' of course.

As Reuters reports:

 

“European finance officials have discussed limiting the size of withdrawals from ATM machines, imposing border checks and introducing euro zone capital controls as a worst-case scenario should Athens decide to leave the euro.

EU officials have told Reuters the ideas are part of a range of contingency plans. They emphasized that the discussions were merely about being prepared for any eventuality rather than planning for something they expect to happen – no one Reuters has spoken to expects Greece to leave the single currency area. [that almost guarantees it will, ed.]

But with increased political uncertainty in Greece following the inconclusive election on May 6 and ahead of a second election on June 17, there is now an increased need to have contingencies in place, the EU sources said.

The discussions have taken place in conference calls over the past six weeks, as concerns have grown that a radical-left coalition, SYRIZA, may win the second election, increasing the risk that

 Greece could renege on its EU/IMF bailout and therefore move closer to abandoning the currency. No decisions have been taken on the calls, but members of the Eurogroup Working Group, which consists of euro zone deputy finance ministers and heads of treasury departments, have discussed the options in some detail, the sources said.

Belgium's finance minister, Steve Vanackere, said at the end of May that it was a function of each euro zone state to be prepared for problems. These discussions have been in that vein, with the specific aim of limiting a bank run or capital flight.

As well as limiting cash withdrawals and imposing capital controls, they have discussed the possibility of suspending the Schengen agreement, which allows for visa-free travel among 26 countries, including most of the European Union. "Contingency planning is underway for a scenario under which Greece leaves," one of the sources, who has been involved in the conference calls, said. "Limited cash withdrawals from ATMs and limited movement of capital have been considered and analyzed."

Another source confirmed the discussions, including that the suspension of Schengen was among the

 options raised.

"These are not political discussions, these are discussions among finance experts who need to be prepared for any eventuality," the second source said. "It is sensible planning, that is all, planning for the worst-case scenario."

The first official said it was still being examined whether there was a legal basis for such extreme measures.” [thanks for the laugh, ed.]

 

(emphasis added)

Nota bene, this is 'sensible planning' for a worst case scenario that their policies will have brought about. As to the 'legal basis for such extreme measures', who's kidding whom here? Since when do governments require a 'legal basis' for anything they want to do when there's an 'emergency' on? That would be a first!

Now, apart from the fact that this is the clearest signal yet to people everywhere in the  euro area's periphery that they must get their money out of the banks as quickly as possible, we are fatally reminded of how the confiscatory deflation in Argentina began in 2001. At first ATM and deposit withdrawals were severely limited, then banks were simply closed altogether for a while (the infamous 'bank holiday'), then the money of depositors was gone/and or devalued via forcible conversion of dollar deposits into pesos that promptly crashed. All of this was done not to save the savers and depositors from themselves, but to save the banks. We already know that the eurocrats will do anything to save insolvent banks, so why not as a 'last resort' interfere with the property rights of depositors?

The idea of imposing capital controls and limiting the free movement of people across borders are likewise threats that must make every thinking person wonder what the hell the whole 'rescue operation' is supposed to be 'rescuing'. After all, these are basic tenets of the EU treaties the possible suspension of which the eurocrats are discussing here. This is what the EU was established for in the first place: to enable the free movement of people, goods and capital. If these are suspended, then what is it that is being rescued?

It seems rather obvious to us that when citizens can no longer get their property from the banks and can no longer move their bodies and capital freely within the EU, then what is 'protected' are not they, but the solely the bankers and the political and bureaucratic elite.

 


 

The growing incentive for inner-European capital controls is illustrated by the imbalances building up in the TARGET-2 payments system. This is not just a mere 'accounting convention' as various eurocrats and central bankers keep insisting. Granted, it won't matter as long as the currency union lasts – but it will matter greatly in case it breaks up – click chart for better resolution.

 


 

Addendum: Argentina – Another Basket Case Going Critical?

Since we have mentioned the case of Argentina above, it appears that the crisis brought on by the dysfunctional populist policies of the Fernandez-Kirchner regime is coming to a head as well. The president just announced that she is 'converting all her savings from US dollars to pesos', which is very likely  code for 'most of my money has left this god-forsaken place already and is safely stashed in a far-away bank'. One wonders why she has kept anything in dollars so far?  After all, she now says that holding pesos is so much more 'profitable':

 

“Argentine President Cristina Fernandez says she is switching her personal savings from the US dollar to the Argentine peso. She said she would move her only remaining dollar account and urged officials to do the same. [if they have any sense, they will do the exact opposite, ed.]

High inflation, officially at 9.8% but unofficially at about 25%, means many Argentines see dollars as a safe bet. The government, which needs dollars to maintain central bank reserves, is also trying to curb capital flight.

"I've just had one fixed term account in dollars for some time," President Fernandez said on Wednesday. "And I've decided to put it in pesos, it's more profitable to have it in pesos."

Economic crises in Argentina's recent history mean many view the US dollar as a safe haven, and some keep part of their wealth outside the country. Savers also have memories of tight controls on bank withdrawals and a sharp devaluation of the currency. Last November, the government imposed new exchange controls.

People wanting to buy dollars have to give their national identity and tax number, which must then be approved by the national tax agency (AFIP) before the transaction can go ahead. And this month further restrictions took effect. Argentines wanting to travel abroad must prove their money was obtained legally and tell the tax agency when and where they are going, and why.

The government's measures have slowed capital flight which last year totalled more than $21bn (£13.5bn). But high inflation is eroding confidence in the peso, analysts say. And with more controls in place, Argentines are increasingly resorting to the informal currency market to obtain dollars.”

 

(emphasis added)

Whenever a government official says something like that, it is basically already too late. The endgame is likely just around the corner.

We have discussed Argentina about a year ago in some detail already, arguing that it looked to us like hyper-inflation was going to be the inevitable outcome of the economic policies pursued by the Fernandez government. We would like to point readers to an interesting more recent write-up at the 'American Interest' entitled 'Argentina Continues its Descent' that seems to agree with our main contentions and points out that Argentina could serve as an object lesson to Europe – if only anyone is prepared to heed it. 

 

 

Chart via IFER, Osnabrück


 

 

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9 Responses to “Velvet Glove, Iron Fist”

  • chris:

    peter

    I have a question or two for you, the Swiss are almost held up as the poster boys of Europe in terms of stability, I don’t believe that for a single second of course, here is Australia we have a national federal treasurer who crows about this country being a ” role model ” for the western world economies, I do know that the national debit is going up in borrowings of 100million a day (Aus ) and here like the Swiss , we have a huge housing bubble, ( the house price affordability is 7 times the price to ratio earnings ) so on the surface relative to our GDP which is about 1 trillion ? ( could be wrong ) any thoughts on where Australia and New Zealand fit into the fiat money bubble ? sure I know WHEN the US dollor crashes and the Euro goes down the toilet, I don’t see many pundits writing what will happen to Australia, most here are relying on China to bail us out and we are supposed to become the “safe haven ” of the west ( I do not believe that crap either ) but there little real data on this neck of the woods.

  • RedQueenRace:

    “This is what the EU was established for in the first place: to enable the free movement of people, goods and capital. If these are suspended, then what is it that is being rescued?”

    Apparently another village will be destroyed in order to save it.

  • I wonder about Switzerland? Their banks are debt bombs as well and dwarf their economy. They had to get on the devaluation train last year to prevent debt deflation from imploding their book of loans into Eastern Europe. Things could start popping like hot light bulbs in an approaching torrential rain.

    • jimmyjames:

      mann–
      Was just talking with a friend in Switzerland and she says the real-estate market is insane for high prices and the economy (low unemployment) is strong (easy credit)
      If i remember correctly 25% of Swiss GDP had been loaned into the east Euro block in CHF when EUR/CHF was 150-160 area and 70% of the Swiss economy is derived from financial institutions-
      The SNB holds more EUR now than the ECB–
      Sounds to me like a real-estate bubble-debt bomb and banking bust about to start cooking off-

    • Funny you should mention that – very prescient. I have written about the Swiss banks today and what a ‘black swan’ risk they represent.

  • Italy has, for all intents and purposes, already limited the amount of cash that can be withdrawn from one’s personal bank account.

    Pater; any chance you could dig out a chart similar to Target2 above but showing inflows into Switzerland?

    On a tangentially related note, when you have time I would be interested in your opinion on how Germany was able to re-arm and rebuild its industrial base between 1930 and 1939 and the role you feel MEFO Bills may have played as well as any similarities you see with today ( if any).
    TIA

    • I will see if I can find a chart for Switzerland. It would probably be best to look at their foreign exchange reserves.
      Regarding German rearmament and MEFO, these bills played a huge role. They allowed Hitler to hide the size of the budget deficit he was running up, allowed for surreptitious borrowing from the Reichsbank and helped circumvent the rearmament prohibitions of the Versailles treaty. The ‘Metallforschungsanstalt’ that issued the bills didn’t even exist – it was an entirely fictional entity.
      I’m pretty sure we can find financial instruments in today’s complex landscape that have similarities to the MEFO bills. For instance, Greece used complex swap agreements to hide the size of its deficit.

  • jimmyjames:

    “Limited cash withdrawals from ATMs and limited movement of capital have been considered and analyzed.”

    *************
    Anyone have an opinion on whether that will apply equally to German banks considering they are the top recipients of the capital flight to safety-

    • Probably not initially, but if one thinks it through, if they implement capital controls in one place, they will soon be forced to do so in other places as well. The mere fact of establishing such controls anywhere in the EU would probably lead to a flight of capital from the entire region.

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