Wednesday, March 04, 2009

The reality is worse

There has been some fluttering in the dovecotes over an imagined conspiracy of silence over EU bank debt. This arises from an unexplained change in an article published under Bruno Waterfield's byline on 11 February.

The original copy was headed: "European banks may need £16.3 trillion bail out, EC document warns," claiming access to a "secret document" which put an estimate of toxic debt in the European banking system at that figure - £16.3 trillion.

The implications of this are truly staggering as the IMF estimates total global losses related to asset impairment at a "mere" $2.2 trillion, putting the potential European write-down at getting on for ten times the global figure.

Less than 24 hours later, however, the headline was changed to become "European bank bail-out could push EU into crisis". The specific reference to the £16.3 trillion had disappeared, along with two paragraphs of the original text.

Despite this, there is no conspiracy. I spoke to Bruno earlier today and he dismissed any such idea. Under pressure of a deadline, he had misread an obscure passage in the Annex to the document, which retailed speculations on what figures had been considered. The figure was not an estimate, per se, merely a record of what some had speculated it could be.

Bruno was not the only one to make the mistake. Guardian correspondent David Gow, made the same mistake, yet his article still stands, with a header: "Bank protectionism will destroy European single market, finance ministers warned".

The reality, though – Bruno tells me – is actually worse. There was no formal estimate as to the extent of the toxic debt in the European banking system because the commission has no idea of what it might be. Debt has been spread through the international system so much that no one is sure of the ownership, where the liabilities lies, or even the order of magnitude. It could be £16.3 trillion, it could be less – but it could be more. No one actually knows.

It is this uncertainty, more than anything else, which is crippling the system. That much is reflected in a comment in the IHT that refers to tensions between France and Germany over the crisis.

What worries everybody, but Merkel most of all – says the piece - is that no one knows how long the crisis will last or how much deeper it will go. No one knows if the economic stimulus measures introduced by several EU member states and the United States will safeguard growth. And above all, no one knows what will encourage the banks to start lending again.

Behind that is indeed the spectre at the feast – that uncertainty which prevents anyone suggesting that any measure, once and for all, can address the crisis and set the global economies on the path to recovery. Effective measures require at least some knowledge of the extent of the crisis, and knowledge there is none.

Whoever said "ignorance is bliss" cannot have been thinking of the global banking system.