The VIX Index is the nearest thing we have to a global Geiger-counter of financial risk. This is how it's trending since the Eurozone crisis kicked off. I'll be blogging more on this and covering the slide on the financial markets later. For now I leave you with the following thought: the VIX is nowhere near the highs it reached after the TARP failed and global contagion took off. But it is higher than it was on the day Lehman collapsed. Discuss.
You go away, come back a week later and the Germans have banned short-selling, and, globally, everybody is now short selling the Euro. Meanwhile the Sunday papers are full of everything from analysis to diatribe about the future of the Euro. Here's my take, which went to press Tuesday night .
Of all the column centimetres devoted to the Euro this morning, if I had to read only one article it would be Peter Boone and Simon Johnson's take . It goes to the heart of the social and strategic implications and is pretty pessimistic.
Normal service resumes tomorrow, with coverage of the 6bn in-year cuts programme, which for all the sound and fury pre-election is now described by the plain-tie Coalition leaders as "modest".
I am "away from the office" this week, on a training course. I'll be back for the big announcement on Monday 24 May of the results of the emergency review of public finances. In the meantime I'm leaving this post as an "open thread" so that all you Idle Scrawl junkies can go on posting comments without me. Tune in at 2230 GMT tv TWO for Newsnight, Monday through Friday.
Two big measures stand out from the Liberal Democrat/Conservative "agreements reached" document. First, the £6bn in-year cuts will happen but there is a caveat:
"subject to advice from the Treasury and the Bank of England on their feasibility and advisability."
Mervyn King gave his approval this morning as to their advisability, but as to their feasibility we will have to wait. There is still nothing concrete beyond what Peter Gershon produced before the election.
Now for the big one:
"New forecasts of growth and borrowing should be made by an independent Office for Budget Responsibility for this emergency budget."
This means:
a) The new government does not trust the Treasury projections of growth
b) It will probably revise the borrowing forecast - most likely upward.
It will be a big ask for whoever is to lead this OBR body. The options are to revise the Treasury's methods or to go straight out to the private sector forecasters who have constantly been more sceptical than HMT.
And the document begs a question. When George Osborne referred to Budget 2010 as a "work of fiction" he may not only have meant the growth projections. The long term deficit reduction plan relied on raising:
If we break this down it is the last one that is subject to variability: the Con-Lib government's crackdown on bonuses and bank structure looks harder than Labour's. And its fiscal tightness may bear down on growth harder than Labour's plans did. So that 17bn may, as its critics suggested, be a triumph of hope over optimism.
So there could be quite a big shock in Budget 2010 two-zero, which will happen within 50 days.
When rapid and decisive change happens it's hard for the human brain to keep up. We have a natural tendency to try and fit reality to our existing ideas - and that's what characterises much of the commentary this morning. But big things did happen between lunchtime and closing time yesterday. Here's my provisional take:
1. David Cameron has accelerated - but not completed - the transformation of the Conservatives into a socially liberal centre right party. He has taken a conscious decision to use the hung parliament to do this, bolstering his social-liberal wing at the expense of the traditional right, and finding an agenda to satisfy, for now the "new" right of the Tory party in the Cornerstone group.
2. Nick Clegg has secured significant compromises that allow, on paper, the Libdems to claim they are not simply "propping up a Tory government" but influencing and shaping not only policy but the whole way Britain is governed. If we get a Liberal tv Secretary and/or an essentially social-democratic (for that is really what Vince is) Banking & Business Secretary then in these two departments - where diktat and crisis management are more important than legislation - will define what the Libdems contribute to the "Clameron" administration.
3. These compromises and rapid moves will be put to the test and could still unravel as the "tribal" aspect of party politics kicks in: the Tory right will want to do some symbolic things that mark their territory, on defence, Europe, possibly industrial relations, and certainly in terms of spending cuts. The left wing of the Libdem mass base stands in danger of bleeding away to Labour and the Greens, which will place pressure on Clegg.
4. The coalition arrangement itself is untested in the modern political context. Under Thatcher, Blair and Brown the machinery of state was wielded ruthlessly: can a coalition really do that, and does it want to? Or will we begin to see public disagreement between ministers; the end of the "party line" government fixers have sometimes tried to enforce in business, science, the professions and the arts?
5. The so-called "progressive moment" advocated by Alex Salmond, parts of the Libdems and the Guardian newspaper has been missed. It's very clear to me, from numerous contacts, that Labour had no appetite to make a coalition with the Libdems happen. The left saw it as a power-grab by a largely unelected rump (Mandelson, Adonis, Campbell); the Scottish Labour Party explicitly rejected "national interest" arguments in favour of party interest. Many English backbenchers could feel the wrath of the tabloids rising and didn't fancy facing both that and the market backlash with a parliamentary minority. Instead a widespread defeatism gripped the ranks of former ministers (there are lots of them); and it dawned on the party's young generation that in a Cling-On coalition they would have no chance to debate what went wrong and renew the party's policy agenda.
6. In the background, the theme tune to this coalition was being sung by Tory negotiator Oliver Letwin and Cameron guru Philip Blond: the small-state, big society agenda summarised in Blond's book Red Tory was pushed relentlessly as the ideological glue that could hold the Liberals, Cameronites and Cornerstone Christians of the Tory right together. We'll see.
7. For now the first big tests are economic. George Osborne gets his £6bn cuts, the Treasury and the emergency budget. But does he get to emerge from an imminent review of the public finances with his claim that they are "fiction" vindicated? And does the new coalition convince the ratings agencies that Britain's deficit reduction plan is serious enough to avoid a downgrade?
8. Finally the media will never be the same again. All the instincts of the Tory red-tops are to dislike Clegg, dislike coalition. Plus the Telegraph and Mail even thought Cameron was a namby-pamby, never mind Clegg. Only the Times can lay claim to any kind of intellectual affinity with what's been created, together with - if they can only admit it to themselves - the Guardian. The Indy (and Observer if it maintains its editorial independence) can claim to have fought for the Lib-Lab coalition, but now that's impossible it will be interesting to see if the Indy moves left. The raison d'etre of the Mirror's slavish pro-Gordon line is now gone so it may be able to reposition itself.
And I leave you with the following observation.
I was born in 1960. Between the ages of 10 and 20 I saw four elections and three changes of government, a hung parliament and an informal coalition.
In the 30 years since then I have seen just two changes of government: in May 1997 and last night.
Both the arrival of Thatcher and that of Tony Blair were triumphalist. They seemed to presage long eras of one-party rule in which the checks and balances on the executive would be eroded. Last night did not - but let's see what happens.
***
I'm about to head off to the Bank of England, where Mervyn King must now adapt to the conundrum: what does monetary policy do when fiscal policy is suddenly tightened; and how does an institution with the feel of an 18th Century opera house (the doormen still wear livery) suddenly become both micro and macro regulator of a 21st Century financial centre.
"In reality we all know who will be running the UK for the next couple of years: the bond market." Gary Jenkins, Evolution Securities, 10 May 2010.
"I used to think that if there was reincarnation, I wanted to come back as the president or the pope or as a 400 baseball hitter. But now I would like to come back as the bond market. You can intimidate everybody." James Carville, Clinton special adviser, 25 February 1993.
If it were that alone I would discount it altogether in this situation: however because it exists in a global market, the price of UK equities can reflect the market's view of what is going to happen to sterling.
If you think the pound is going to fall and remain low, you hold fewer shares in British companies.
Next, the foreign exchange markets. Forex is a 24-hour market, into which many speculators and day traders have piled, but it plays an obviously vital role as a barometer of investors' expectations of economic growth, inflation and the public finances.
However, since you have had a government and central bank in Britain happy to acquiesce in a 25% fall of sterling since this crisis began, I would not be rushing around headless at the odd dip in sterling.
Sterling will only become the speculators' target once the fundamentals become unpredictable, as in Greece.
It is the bond markets that are important in this crisis, and for the obvious reason that the UK government has to go, repeatedly, to them and borrow money. It is doing so today to the tune of £2bn.
There is - and read my lips - no danger that the UK will default on its debts; or that the international debt markets would suddenly close to the UK. The danger is that those who buy the bonds start to demand a higher interest rate, to the point at which it becomes dysfunctional to finance Britain's £1 trillion debt, and it pushes the interest rate on everything more risky upwards.
(Jargon buster of the day: The effective interest rate on a government bond is called a yield: as the bond's price falls, the yield rises.)
There is a clear material difference between the bond markets and stocks, currencies and derivatives. The bond markets lend money to the government and thus their reaction to what the government is doing has to be logical, ruthless and unsentimental.
So who are these here bond markets? Well, fundamentally, it is you.
Pension funds hold large amounts of government bonds because the interest on them provides a steady and predictable income and they are not liable to fluctuate in price.
Hence the bond markets tend to be dominated by people from pension fund managers: Threadneedle, Norwich Union, Standard Life, for example, as well as the "fixed income" desks of the banks which make money out of buying and selling the bonds.
If bond buyers aggressively punish governments who do not look like they have realistic budgets, or who overstate growth, or who - as in Greece - cook the books, that is because they do not want to have to write you a letter saying "sorry we lost the money you put aside for your pension".
Indeed, such is the culture of caution, that a one or two per cent loss in this profession can be a career-ending moment.
Now it is still going to rankle with you that these bond markets have the power to make or break governments, to insist on what electorates sometimes want to reject.
That "markets" and "bonds" seem to have power over "voters" and "governments".
But I want to invoke in their explanation an economist not often quoted on Newsnight:
"The commodity form... is nothing but the definite social relation between men themselves which assumes here, for them, the fantastic form of a relation between things."
Yes, the original Doctor Doom, Herr Marx of 1 Modena Villas, Camden, put his finger on it. (Capital Vol 1, p165). He pointed out that, in a market economy, people's own "movement within society has for them the form of a movement made by things, and these things far from being under their control in fact control them". (p167)
He lamented the fact, but he also understood it: "market forces", which appear to be uncontrollable by human beings and look more like a force of nature, are just the products of human action, mediated by an economic system.
What gives the bond markets their ruthless character is, you could argue, the ruthless determination of millions of middle class retirees to buy a cottage in the country, a Labrador and globetrot like grey nomads the archaeological wonders of the world. To not have their savings lost by incompetent fund managers.
Oh, and the fact that we all want credit cards and mortgages - because these two basic financial instruments also require the bond markets to exist. Ditto all manner of public bodies, such as local councils, housing associations etc, which access the bond markets.
There is the related question of Credit Ratings Agencies (CRAs). Those who know this market are expecting the CRA guys to start tapping the bezels of their Jaeger-LeCoutre chronographs quite soon in quiet indication that they need some kind of certainty about what is going to happen.
Some bond market professionals I know pay scant regard to the CRAs and there is a legitimate argument that you could run a bond market without them. What they have tended to do is issue signals that become qualitative inflection points: as with Lehman, in the world of the CRA it is always going swimmingly until its not, and the first downward notch usually signals rapid decline.
The CRAs got the credit boom badly wrong; were caught red handed distorting their own findings under pressure from the mortgage-backed securities industry. For this reason they are being doubly hawkish over sovereign debt: at the first sign the UK has no coherent or credible plan to reduce the deficit, they will downgrade.
Indeed there is a theory high up in the investment banking industry that only a downgrade will create the kind of government that can address Britain's debt problem.
Now to the specifics of today. A Lib-Lab government, say analysts and BNP Paribas, would "almost guarantee" a downgrade. Let's see.
The current British government has a deficit reduction plan. It is quite tough, front-loaded but suffers from two related problems.
The first is it might be over-optimistic, based on growth figures the markets (i.e. the guys employed by you to look after your money) do not believe. Second, it is absent any detail for about four-fifths of the cuts envisaged. Nobody can judge whether the plan is achievable until they know whether it means massive pay cuts for civil servants, the loss of the strategic nuclear deterrent, a massive sell off of state assets, etc.
The Conservatives have a tougher plan on paper, with cuts starting this year and a more aggressive deficit reduction curve (but still; like Labour and the Libdems, only getting debt below 40% of GDP by 2031).
The problems: first the Conservatives seem to have moved back from trying to ring-fence the budget process within a coalition government. Vince Cable has reportedly been offered a "quasi chancellorship" and Tory sources believe they have already "split the difference" over this year's £6bn cuts.
Anybody who hoped or feared the Tories would bring in a draconian, ideologically driven, socially confrontational budget can forget it in a Lib-Con coalition whose theme tune is being composed by Philip Blond and Oliver Letwin.
As for the Lab-Lib coalition: the worry in the markets - on top of the budget plans being softer than the Tories' - is that Lab-Lib does not deliver certainty, stability or credibility.
What they fear from all parties was demonstrated when it emerged last night that the Conservatives have agreed to the £10,000 tax floor demand of the Libdems, which should cost £17bn. We do not know where that would come from, though as one wag in the Newsnight office pointed out, they could always scrap Trident.
The markets thought that, even with a hung parliament, we would get a stable coalition of the Lib-Tory type, or a confidence and supply based Tory government.
Now - over a weekend - a lot of things have become uncertain. Because the deals are being done behind closed doors, with participants emerging only with concessions and not painful economic remedies, the fear in the bond markets will probably have to be addressed head on, in the form of restatements of commitments to cuts, tax increases and growth.
One final note: there is a lot of opposition to public service cuts. The New Economics Foundation makes the case that £50bn of the deficit could be addressed through closing tax loopholes. Others point out that selling off RBS and Lloyds Group could raise tens of billions. But in the end, if you want to keep going year in, year out, to the pension funds to borrow money, you have to show a long term plan consisting of some cuts, some tax rises and above all some growth.
To summarise, the difference between the bond markets and the stock markets is that, with stocks you are taking a bet on a race. With bonds, if you place a big enough bet, you can influence the outcome of the race.
That is why we should care about what they are doing.
The euro bailout deal consists of several massive moves and, as far as the eurozone is concerned, signals a fundamental change. But not the end of the global crisis. If 2008 transferred global risk from banking to state finances, this transfers instability from the sphere of state finances to the sphere of global and social politics
Here is my first shot at explaining what they have done. Pitch in if you think I have got bits wrong as we are all still struggling with the detail.
To counter the risk of the Greek crisis spreading to Spain, Portugal and Ireland the 27 EU countries have created an emergency loan facility of 60bn euros. That means that the debt markets no longer have them by the throat next time they need to go and issue bonds.
But 60bn euros would never be enough to counter the strategic problem. The strategic problem is that the eurozone authorities were not seen to stand behind their own currency under speculative attack and the danger of default. So they have created a complex loan facility coming to 440bn euros. On a "pro rata basis" the 16 eurozone governments have signed up to back this loan facility, which could completely swallow up the debts Spain, Ireland and Portugal.
The fact that this is called a "special purpose vehicle" - a term we all remember from Enron, Lehman and the London Tube PPP - gives the game away. Like all SPVs it is designed to make unclear who ultimately shoulders the risk. Since "Europe" does not have any money itself, the implication is that Germany, France and Italy now stand behind the rest of Europe. But the implication will be hidden behind bilateral deals, clauses etc.
On top of the 440bn euros, the International Monetary Fund (IMF) has pledged 220bn euros. It is clear where the IMF money comes from - its member states, which again include France, Germany, Italy - but more importantly here the USA, Canada, Britain, Japan etc.
Since the IMF is a lot less flaky an organisation than the European Union, and always demands strict conditions, I am assuming the IMF pledge is "senior" to the EU one. That is, the IMF gets its money back first.
Then, on top of all this, the European Central Bank (ECB) has decided, in effect to do quantitative easing: it will - and it will accept rubbishy debt as collateral for borrowing clean, shiny euros. This reverses the entire course, and culture, of ECB policy since foundation.
However, I am not clear how much money the ECB will actually print. The key point is this is a massive policy reversal for the ECB and has political implications.
All this comes on top of the 110bn-euro bailout of Greece.
And there is more. The US Federal Reserve has re-activated the measures it used in the autumn of 2008, which allow banks to borrow in dollars without having to actually make the currency exchange, and therefore stop the global credit markets from retreating into national or continental fortresses.
Now - what is it designed to do and will it work? And how does it change the eurozone?
The core problem is the lack of credibility of the deficit reduction plans on the eurozone's periphery. Greece was the extreme example: no way could it borrow at manageable interest rates on the markets so the eurozone agreed to lend the money, giving it more time to cut its deficit but demanding tougher conditions.
But the markets did not believe the Greek people would ever accept these conditions; and they believed Greece would "restructure" its debt - so they would only get a percentage of their money back. So they ramped up the cost of lending to other eurozone governments.
This move knocks that problem on the head. The key weapon is not the 440bn-euro loan facility - which as I write only exists on paper. The weapon is quantitative easing - buying up debt to pump money into the system.
Why it is radical becomes clear if you compare it to the Bank of England's move to print £200bn. That £200bn shows up on the "balance sheet" of the Bank, not the British government. But the Bank of England is ultimately an arm of the British state - whatever its formal constitution says. Ditto the US Federal Reserve. However, the ECB is a central bank without a state to underpin it.
The move to printing money is a signal that the EU has to create something more like a state to back the ECB.
Not only is the EU now committed to much stronger fiscal - i.e. tax and spending - oversight. It is now implicitly committed to becoming an economic super-state.
Now, will it work? In the short term it should. The reason it seems to the European governments that "speculators" are attacking them is because we have created a huge economy of derivative financial instruments - the biggest being interest rate swaps - that are supposed to enhance market functionality but which in fact have an inbuilt tendency to punish stricken states.
But considering the scale of intervention, it has to work. The very scale of the action reveals that the eurozone crisis was at least as big as the Lehman-induced meltdown of 2008. We found that hard to grasp because instead of panic stricken bankers in Manhattan the signal was fighting in the streets of Athens.
But here is the problem. What we have been dealing with since September 2008 is, to put it really clearly, money lost. Half the value of the world's stock markets was wiped out; bank shareholders were wiped out and bank debtors lost a lot. That caused a mini-slump and a trade collapse which was only reversed by the massive injection of taxpayers' money into the economy, and by printing money, and by some countries devaluing their currency.
But mounting losses reduce growth. The actions of the G20 transferred the risks and losses from banks to states - but states cannot bear losses on this scale if their economies do not grow. The whole contagion risk - from Greece to Spain to the UK - lay in the fact that states were refusing to accept the level of budget cuts needed because they had agreed to assume the losses.
The overbearing risk to the global economy had always been a debt-deflation spiral, where the cost of meeting unpaid debts led to low growth, falling prices and wages, the collapse of state finances and the need for governments to then adopt policies which worsen the downturn. This is what happened in the early 1930s and is called "pro-cyclical" in economics.
Now, from Washington to London to Frankfurt all that stands in the way of debt-deflation is the state. In the form of massive money-printing exercises through central banks; and in the form of states underwriting the banking system; and in the form now of big states agreeing to stand behind small states.
Britain's maximum exposure, if all of the money was lost, is £8bn - says Alistair Darling. But our moral and political exposure is much larger.
For this massive, shock and awe style bailout does not make the risk disappear. It simply transfers the risk in southern Europe to the governments and taxpayers of northern Europe through the parallel mechanisms of the Lisbon Treaty (a 27 nation bloc) and the eurozone (a 16 nation bloc). And in fact once again the US Federal Reserve has assumed some of the global risk - its balance sheet will have to expand to do the currency swaps.
We are only beginning to get our heads around the detail of this deal but its geo-strategic and moral implications are clear. Big states have bailed out little states and will demand reforms that change the lifestyle of people in these states forever. Northern Europe has effectively seized control of southern Europe. The eurozone is on a path to becoming a supra-national state-like entity.
But because every step of the EU project has been taken by elites, with the populations left to work out what was happening months and years later, we can now trace very accurately where the risk has been transferred to. It has been transferred to politics: will the people of Europe accept the consolidation of the eurozone, with the loss of economic sovereignty that represents?
In short, in a matter of two years, we have transferred risk from the banking system to the state finances to the streets. And the risk is only partly dissipated by this transfer.
In looking for a metaphor to describe the anti-crisis measures, I am thinking of tank armour. It consists of layer upon layer of complicated material - ceramics, metals, fabrics - which diffuse impact. When a sabot round goes through one layer it loses energy, then the next, then the next. If you are lucky it never penetrates the final layer and the crew survives. But take a look at the armour: it is destroyed, mangled, defabricated. It can never be used again.
I've been on Whitehall half the day - see the movie:
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Here's what I think is happening, based on calls to several wings of Labour and a source close to the Conservative team.
Lib-Tory talks are certainly progressing because the Conservatives proffered, and the Libdems accepted in principle the idea of a socially liberal government, real power sharing, significant cabinet seats and policy compromise. That is an alliance based on principle not tactical convenience.
But the sticking point is the scale of the Conservatives offer on PR (I cannot find out for definite what it is, but it's more than they started with and less than the libdems want - and it certainly does not include a referndum on full PR).
However both parties face major angst - from their membership, their blogosphere and their backbenches. I think tonight is all about trying to quell that. Libdems are speaking about various padlocking bills that would remove control over the electoral timetable from the PM in a LibTory government, so that Cameron would not be able to hold a permanent gun of summary dissolution to the Libdems' heads throughout the coalition.
If the memberships and backbenches don't buy the coalition, we could see a reversion to the minority Conservative government project but with a formal agreement to vote for budget and confidence.
Now to Labour. There is growing fury with Gordon Brown and, now they've had time to think about it, the campaign. I have spoken to several Labour backbenchers and apparachicks tonight - from different wings of the party - and the adjectives used to describe the campaign, the personal performance of the PM etc are generally disparaging: managerial is one of the repeatable ones.
Large parts of the Labour voting base, the Guardian etc, believe it's still possible to create the Lib-Lab-SNP "progressive coalition" and get PR. However very few front rank Labour politicians are out there arguing for it: Alistair Darling, despite having a hefty task in front of him in Brussels, has been the most upfront in keeping it alive.
During the day I have heard several high profile Labour backbenchers move over to the "go gracefully into opposition and do it soon" line, though mostly still in private.
Then there is the leadership issue. It breaks into two parts. First, even though there is no "coronation", if the David Miliband camp and the Jon Cruddas camp were to get together it would make David Miliband hard to stop. Labour would suddenly have, goes the argument, an Attlee and a Nye. A plausible centrist leader and a leftist who can reconnect with the base. This is being mooted but is not a done deal.
Since Harriet Harman has ruled herself out of seeking the leadership I can see Ed Miliband emerging as a candidate backed by parts of the union movement (eg the GMB) who don't want an alliance with David Miliband. Ed Balls would be backed to the hilt by the existing party machine, Unite and to an extent the "old Labour" left; also the Scottish Party.
The Labour NEC meets on Tuesday and Labour officials are in a rolling meeting schedule until then to decide how to respond if the party goes into opposition. One told me to expect civil war between the Brown "machine" and all those hitherto excluded from it, from the moment the PM leaves office.
And the Euro-crisis is also focusing the timescale with Labour as well as the Lib-Tory talks. If you think there will be an election in six months and the big issue is going to be competence and coherence of a Lib-Con coalition, the argument goes that anti-Euro David and pro-Euro Nick should probably be handed the job of dealing with the global fiscal meltdown as soon as decently possible.
[UPDATE 1245: European Commission finalising proposal right now. Britain's position: no contribution to 60bn stabilisation fund, but not opposed. Opposed to EMF says Treasury. Not clear whether the 600bn proposal equivalent to quantitative easing is in the Commission draft]
As I write, a helicopter is buzzing overhead filming a crowd of journalists on Whitehall. But the real action is going on elsewhere. Europe's 27 finance ministers have been summoned to Brussels to vote on a deal to protect the Eurozone from fragmentation and its weakest economies from fiscal meltdown.
On Friday the EU leaders agreed that a comprehensive bailout was needed by 6pm today, when the Asian markets open.
The bailout needs to do two things:
- Provide a permanent and stable bailout mechanism for those south European economies whose borrowing costs are rocketing and are threatened with default: Greece, Portugal and Spain.
- Provide a mechanism to pump money into the banking system in the case that contagion crosses over, via bad sovereign debts, into the very banks that hold the debts.
It is not clear what the mechanism is or where the money will come from.
On Thursday the ECB ruled out a European version of quantitative easing, whereby the ECB would print money and use it to buy up bad debt. The reason is that overnight the image of the ECB, and the Euro as a currency, would have collapsed from rock solid orthodoxy to tactical, politically-driven status. The Euro, already 5% down on the week versus other currencies, would have been damaged as a global reserve currency.
Now it is being mooted that the European Commission - the de facto government of Europe - raises about E60bn for a "European stabilisation mechanism". Markets were awash on Friday with rumours of an E600bn loan facility to the banks - one year money at 1% - backed by money guaranteed by states.
On top of that, Merkel, Sarkozy and ECB boss Trichet are pushing for the creation of a European Monetary Fund - an EU version of the IMF - where governments commit significant sums to bail out any ailing countries.
Alistair Darling is in Brussels and has consulted with Vince Cable and George Osborne. There's some briefing coming to the Sunday papers about Britain "not committing taxpayers' money". But the short term 60bn facility could be decided on by qualified majority voting; the bigger issue of an EMF would be a 110mph arm ball skimming straight at the cricket box of David Cameron, should he become PM tomorrow. Because the Tories were getting ready to put the brakes on Britain's relationship with Europe.
If the EU leaders get their act together tonight, and launch something meaningful, it will necessarily accelerate the creation of an EU fiscal authority: in plain English, the Eurozone will enforce sound public finance in a way it never did before. But the price will be that, instead of the Gucci lifestyle that came with Euro entry, for southern Europe there will be a decade of recession and slow growth. Germany and France will impose the cost of financial stability on the populations of southern Europe.
For this reason all decisive outcomes are unpalatable. Today German voters are going to the polls along the Rhine and will most likely deliver a negative verdict on the idea of Germany bailing out southern Europe. Meanwhile the negative verdict on the same deal will be passed on the streets of Athens, to the soundtrack of breaking glass and tear gas grenades. European democracy is passing its opinion on the Euro arrangements and it is negative, on both sides of the coin.
When our whey-faced, sleep-deprived politicians say "we need stable government in the national interest", bear in mind that they have all now seen the papers, heard the briefings. I don't know what the outcome of the Brussels meeting will be - nor what the market response will be. But if it spirals in a negative direction over Sunday night/Monday morning it will light a fire under the politicians weighing their options for coalition government.
One other thing: my discussions with the politicians and their hangers-on over the past 36 hours have convinced me minds are changing.
As they speak to each other they are beginning to go beyond the tactical manouvering - which was the main tone on Saturday morning ("How can we do a deal and shaft our main rivals for a decade?"). They are beginning to move towards an understanding that they will have to give up some of their ideological commitments in exchange for power. It is "looking likely" says one source close to the Conservative negotiating team.
Tantalisingly, the "Plan A" of George Osborne - an emergency inquiry into the public finances, the inevitable finding that they are worse than imagined, and a draconian emergency budget with an even bigger scale of fiscal austerity - may have to happen under scrutiny of a LibDem Chief Secretary to the Treasury. Though the numbers may come out just as tough, the option for an "ideological" emergency budget is now gone.
Last night I was convinced most Conservative activists and politicians were minded, for these reasons and others, to go for minority government. Right now, with Alistair Darling just off the plane in Brussels, I am thinking the global situation may reinforce the hand of those in the Conservative negotiating team who want to "do a Disraeli" - accepting a social liberal economic programme and some realistic path that allows the Libdems to get a referendum on PR in return for stable government.
Thus, in the space of 48 hours, we may see the completion of the Conservatives' political transformation - even as the papers supporting the Tory right try to put the whole thing into reverse. Or we may not. That's the nature of a historic crisis.
This graph shows the yield on a 10-year British government bond - or gilt - over the last 48 hours. It contains the definitive answer to the question: how will the markets take the hung parliament.
Let me talk you through it. The graph shows gilt yields. Higher is bad - because it reflects the market's perception that lending to Alistair Darling is more risky.
On election day (left hand side) the gilt markets hover nervously. Then at 8am today they wake up worried: the graph starts higher and works its way up through several ticks. Then at 1043 Nick Clegg nominates the Tories as his first preference coalition partner. Immediately the risk indicators fall back.
But then they build again as Gordon Brown goes public with his determination to try and form a coalition.
Then at 1400 David Cameron makes his detailed pitch to try and get the Libdems on board. And the graph falls back.
The human story is, say my City sources, the City just did not see the strong Labour fightback in the urban areas. They thought a hung parliament would give the Conservatives a stronger moral claim on Downing Street than they actually emerged with. You could read this graph as the City liking the idea of a Libdem coalition. Or of the City worrying about the weak Libdem showing, because it allows the Libdems to be pulled into a Lib-Lab coalition that - they fear - might be tempted to soft-pedal on deficit reduction.
Tonight I'll be exploring this some-more on Newsnight at 2230GMT, together with emerging tipoffs of a major EU bailout plan aimed at stabilising the banking sector. But for now - that's the political day in a single graph.
I spent 12 hours at the joint count at Richmond Park and Twickenham. Vince Cable got 32,000 votes (and the Tories grew their vote too). But in the neighbouring Libdem constituency Susan Kramer was ousted by Zac Goldsmith.
How come? Zac ran a high profile zippy campaign with blue windcheaters, electric bikes and what looked to me like several chapters of Debrett's peerage in tow.
Yet he - anecdotally - took votes off the Libdems and Labour in the least affluent wards.
Just like Tommy Carcetti in Series IV of The Wire, he took in one ward 2/5 of his opponents' base. As a result he had a 3,500 majority compared to Susan Kramer's 3,500 before.
Does this hold any lessons for where we go next? I think it might. Goldsmith won because he looked unlike a traditional Tory. The Zac machine "k-i-nd of fitted" on top of the traditional Tory machinery, the constituency Chair told me, with a long melismatic swoop over the word "kind" that indicated that it had not been easy.
Zac won, Caroline Lucas won, the Alliance ousted the DUP's figurehead Peter Robinson. People voted for change - but their idea of change was not the same as that of the major party leaders.
The political system was not capable of capturing it (that's not to say any other proposed system would be any better either).
So where now? I've said before the markets factored in the idea of a hung parliament, but not a chaotic one, where the arithmetic is so tight that small parties call the shots.
What's changed is that Britain's political stasis emerges in the middle of a global panic over two linked things:
a) Europe's fiscal crisis is getting out of control
b) Europe's political class does not have the skill or willpower or institutions to sort it out.
As of right now - with the polls predicting 306 Conservative MPs - Britain fits very neatly with point b) even if our fiscal situation puts us last on the list of economies that will fall over if the Greek contagion spreads.
I think just because Cleggmania fell away it does not mean that the new enthusiasm of young voters, and their clamour for something better, will go away.
I see the Zac phenomenon, the Greens in Brighton, the Alliance in East Belfast as part of the same wave. Also the massive queues outside hapless polling booths betoken the enthusiasm of young voters.
Now we are the other side of the big vote, all that prevarication about not specifying tens of billions of cuts will come home to roost.
It is very hard to imagine a minority government getting through an emergency review of the public finances which discovers the existing budget to be "fiction", then an emergency budget and £6bn of in-year cuts.
But the scale of the debt panic in the world probably also demands more in the way of credible fiscal austerity than Labour were offering, and a faster move towards cuts.
The crisis is, once again, moving faster than the politicians' brains, and the political institutions can cope with.
In the midst of it all I can only leave you with an image from the end of Zac Goldsmith's triumphant count. As his supporters filtered out, looking like the cast of Brideshead Revisited would if they had discovered hair putty, one woman said to another: "I feel so alive!"
The Dow just lost about 9% of its value in a sudden plunge, It has bounced back and stands at 4.25% down on the day. Obviously the markets have the jitters over Greece and the survival of the Eurozone. But City types are telling me it's almost certain to be what they call a "fat finger" trade. That is, somebody probably hit the wrong key.
Meanwhile the FTSE100 closed down 1.5% and that magnetic 5000 line seems to be enticing it downwards once again, dragging London share prices back once again towards their 1998 levels.
I will be on air at some point tonight for the tv's election coverage, from a venue in South-West London. I'll be twittering once the polls close, after 2200.
The last five years summed up in a graphic.
There is only one poll that matters - and that is tomorrow. But as a journalist who lives in the world of graphicised information I thought I would share this with you.
It is a graph showing the results of all the opinion polls taken since the last election, with the results for the three main Westminster parties only (Source: ).
Note: The horizontal axis is not consistent - there are more polls towards the end, so time stretches towards the right of the graph.
I've picked out what look to me like turning points, in hindsight. Fortunately some of them were nights that had us skedaddling along corridors with mobile phones wedged under our chins and plastic earpieces protruding from our collars, so we actually spotted their significance at the time. Others maybe not.
Cameron takes charge of the Conservatives; Brown takes over Labour and there is a bounce; then - massively significant with hindsight - there is the "wobble" over the October 2007 "election that never was".
I remember standing in the Newsnight studio that night and saying "there's a wobble" - but you can only know how important things are much later.
The Lib Dems' fortunes turn after Ming Campbell resigns, but only gradually. Labour gets a rebound at the start of the financial crisis but then loses it all and more. The rock-bottom day for them was the day James Purnell resigned, on the eve of the Euro-elections, bringing to an end a Spring season of cabinet disarray, accompanied by cross-party angst over expenses.
But the seismic shift moment is clear. For a week after the election is called the polls barely move. Then the first televised leaders debate happens, 15 April 2010.
We will only know for sure whether any of this is relevant after tomorrow but if this was a graph of any market you'd be glued to it.
Let me be brutally "macro" and put it as clearly as it demands. The Greek crisis is not over, but its shape has changed. Its implications are bigger and more serious than when it started.
For most of 2010 the issue was whether the Eurozone would bail Greece out. Then last week, absent a bailout, the issue was whether contagion would take down Portugal and Spain. Now, in light of the EU-IMF led deal the markets are taking a long hard look and raising three strategic doubts.
First let's look at the shape of the Greek bailout. Greece has to cut its budget deficit from 13.6% of GDP to 3% by 2014. Of this more than half the tightening will come from spending cuts, and about 4 percentage points from higher taxes.
The bailout is much more comprehensive than the one originally agreed upon by the Eurozone finance ministers: Greece gets two extra years to sort itself out; its banks get access to the European Central Bank on terms that break all the rules: but the impact on the Greek economy is much tougher.
We will never know whether the Papandreou government's original hopes for of a rapid return to growth were right. We do know it is impossible now. The net impact of this austerity package will be to take 8% out of Greek GDP.
Over and above the impact on people's pensions, wages, shopping bills (see what 23% VAT feels like when you hit the tavernas this summer) - the macro impact is simple: this is a deep recession imposed on Greece from Brussels and Washington.
Will the Greek people bear it? To the Anglo-Saxon commentariat the sight of trade unions with communist flags launching organised assaults on lines of riot shields are a bit of a mindbender. But it is not this that I would worry about.
When I spoke to the communist-led stevedores at Piraeus in March it was clear they're not the kind of people who would lead, spark or desire a chaotic social explosion. They are family men with a strong sense of community, nation and solidarity. They've been poor before, they've been on strike many times. Like Unite the union they have their fixers and lines into government.
What you have to worry about - and here Greece is just the point of the wedge in the global crisis - are the cappuccino generation.
It was to avoid having to repossess mobile phones out of the hands of the young, to replace the queue at the Starbucks counter with the dole queue, that the world's politicians bailed out the banks. Not a single mainstream politician was prepared to confront the possibility of market forces being unleashed in the form of bank failure and consumer slump.
The young have been, by force of the macroeconomic model adopted over the last 20 years, pushed into a lifestyle of early debt, fast fashion, low prospects. I saw the lifestyle of social solidarity and sterilised milk removed from people of my parents' generation in the 1980s and it was traumatic. But the new lifestyle - the globalised, consumerised debt-driven lifestyle - was supposed to replace this: it was supposed to be the solution.
For people under 35 I think losing the cappuccino lifestyle may be even more traumatic than it was for miners to lose the coal mines. To be told you will never have a job with a decent pension; you will be poorer than your parents - we don't know how this will impact.
And in Greece there is a whole generation of young people already very unhappy. Higher education is poor in Greece; corrupt societies - and Greece is by the admission of its own government riddled with low-level corruption - tend to dis-benefit the young, because they have no power.
So the question of will Greek people stomach this devolves onto the young. Those I've interviewed - and this unites left and right in politics - are carrying around a sense of betrayal. And that's before a single cut's been made.
Next question is: what happens to growth? Greece will now enter a prolonged and deep recession driven not by economic accident but by policy. And here again Greece is a warning to the world. The danger of a public-sector driven double dip in southern Europe is what's haunting the markets.
But that only begs the bigger questions: what happens to the USA when its fiscal stimulus runs out - and when fiscal reality begins to hit individual US states who are, by law, required to balance their books? Right now the US recovery is, whatever the figures say, fragile. House prices could go into a double dip on their own, without the help of a public-sector recession. But in a year's time the USA will have to end the stimulus.
Likewise the monetary stimulus: it's been massive, both in Britain and the USA. Money printing on an unprecendented scale; interest rates at 400 year lows. What happens when this has to be tightened?
Greece spooks the markets because it reminds them that, despite the soaraway profits and bonuses at the investment banks, we could go into a global double-dip recession - and if we do, there are no bullets left in the clip in terms of saving the banks.
Finally, the Eurozone. The Eurozone has proved spectacularly that it doesn't work. Its rules are shot: the no bailout rule; the no-IMF involvement presumption; also the quality control over collateral at the ECB is a dead letter.
But there is more: only the intervention of the IMF, and the quite sterling professionalism of the Greek government - which drove a hard bargain but did not succumb to demagogy - made this deal happen. Left to the European Commission, Angela Merkel et al it was a mess. Europe's leadership has been judged unimpressive by the ultimate voting machine, the markets.
But harder choices lie ahead. Either the Eurozone can tolerate debt defaults or it cannot. Either it creates a bailout fund or it relies on the IMF. We still do not know the answers. Realistically the answers will come from the electorate of Germany and France over the next couple of years - but there is a clear danger of the Eurozone arrangements becoming dysfuncitional.
Finally, another macro lesson is being missed as we all focus on the UK election.
Europe looks like the weak link in the global system.
Sure China's bubble is about to burst again; sure, Obama has to exit the stimulus sometime. But Europe is where phase two of the crisis ended first. And phase two of the crisis was, essentially, fiscal and monetary stimulus to keep the cappuccino generation off the dole queue. It's over in Greece, Ireland, Portugal - and it will soon be over elsewhere in Europe.
If there is one place in the world where the impact of imposed austerity is unpredictable it is Europe, for all the reasons history tells us.
One of the best TV series hook lines ever was the famous : "Marineville I am calling Battlestations - anything can happen in the next half hour". Well that's how this election is beginning to look. In fact if copyright allowed it, I would gladly replace Newsnight's opening titles with .
As the media gets back to its 24-hour rolling frenzy after the long weekend this morning it's worth trying to summarise what's happened since last Thursday - because I think it will be seen as significant with hindsight, and makes the whole situation unpredictable.
First the Guardian came out in support of the Libdems. Defying expectations - and calls from within the editorial team - for a simple tactical voting line, the self-designated "global voice for liberalism" adopted a capital-L - and that could presage bigger changes on the centre-left of British politics. This created a momentum within the Labour party that has resulted in parallel coded calls for tactical voting this morning, from Peter Hain, Ed Balls and Lord Adonis.
Then there emerged the "plot against Gordon" briefings. Patrick Hennessey of the Telegraph : if Labour has to approach the Libdems on Friday morning for a coalition you would see simultaneous moves to replace the leadership, with the usual camps lining up - David Miliband (visionary neo-Blairite) versus Alan Johnson (affable stop-gap). Veteran Labour journalist Will Hutton called for Nick Clegg to become PM.
Gordon Brown, who had only decided to speak to the London Citizens' conference on Friday, turned up to it on Monday and delivered a left-leaning, barnstorming speech to an avalanche of applause and a lot of surprised Twittering by labour folks along the lines of "who is this guy who looks like Gordon?"
It was not just the Guardian's move that focused minds within the Labour hierarchy: it was the emergence of the "momentum" theme in media coverage of the Conservatives. Conservative internal polling has, for several days, been consistent with last night's - which is that they have a differential 7% swing in the marginals that could give them a tiny commons majority: but only as long as they don't lose seats to the Libdems.
This poll is actually really interesting. Remembering it is a poll of marginals, it states that: about 11% of people have already switched votes during the campaign; about a third are open to changing their minds; and the Libdem vote is softest followed by Labour. In short it confirms that there are too many variables to call it.
Meanwhile Conservative spin-doctors are working overtime to create a "quiet march to Downing Street" momentum.
David Cameron broke with tradition and began to spell out some of the immediate actions he would take - and began to put out messages of reassurance on protecting front line services. I read all of this as political ammunition for a push into the "red" end of the Labour-Tory marginal list, with an emollient message to areas where he knows there is residual mistrust for the Conservatives.
Within the Libdems there are two scenarios emerging. The first - which their campaign evidence seems to encourage - is that they might come second (obviously they want to come first) in the popular vote. If this happens it will turn Cleggmania into a much bigger political phenomenon and you will begin to see post-election re-alignments in British poltics. The second scenario is they get squeezed in the last few days but still emerge with somewhere between 70 and 100 seats and become instantly kingmakers in a hung parliament.
Interestingly the Libdems are still struggling to understand where their surge of support is coming from: they are getting mass sign ups to all Clegg's public meetings; are recruiting massively online and raising money ditto. Anecdotal evidence from party workers suggests quite a lot of this is happening within Labour areas and from within - yes, our old friend "Mosaic Group E" - young, urban, transient and trendy. There are some within the party who believe this puts them at the head of a true, Obama-style postmodern demographic swing. Others see it simply as a reward for a lifetime of thankless hard work.
With all the newspapers now indicating their voting preference, and rising calls for tactical voting between Labour and the Libdems, all three party machines believe there is, if not "all to play for", then something to play for. Their relentless campaign schedules matter; as does the crucial battle for domination in the broadcast media. It will be relentless for 48 hours now.
Oh and the bond markets have decided to open at 1am on Friday so that, before 90% of the votes are counted, the international markets can get their retaliation in first. There's no Newsnight on Thursday night but I will be out, armed with my earpiece and the idiot's guide to 10-year gilt spreads, at a constituency count that I am told will finish at 5am.
By then it will be all over bar the shouting - but for once I think we can guarantee there will be shouting, and not all of it ecstatic. Keep your finger on the refresh button and follow me on .
George Papandreou's speech to the Greek cabinet was light on detail of the austerity package - that will be announced later - but heavy on a certain kind of rhetoric south European voters will have to get used to.
If you want a case study in catharsis, also in turning a crisis into an opportunity, it's worth a read. here are some exerpts:
"Ladies and Gentlemen, we know that these are hard sacrifices, but they are necessary. This is the only way that we will be able to finance the 300 billion Euros debt we have. If we do not finance this debt, Greece will go bankrupt..."
"I have ordered the Minister of Finance to speed up the procedure for drawing up the new electoral law so that the political system will be established on new sound basis. We must say in all sincerity to the citizens of Greece that we have trying times ahead. We are seeking a new meaning to our values however, such as quality, humanness, democracy, solidarity between us - we are opening up a new road...."
"We do not promise to have an easy or painless time over the next few years. I do however promise three basic things: first of all that we will do everything to protect the weakest in this crisis.
Secondly: that the feeling of justice will be consolidated since this has been lost and obviously there is anger. This is something we feel, we all understand. Something I understand. This is the rage of citizens today who have to pay for the sins of others. Justice, equality in the eyes of the law, the just distribution of burden and wealth are for us a daily battle and commitment.
Thirdly: I promise to fight alongside all of you and to make this crisis an opportunity for change. We must change, Greece must change, we must think and dream differently, and make Greece different. This is a new beginning which will make us proud of our country and of our work."
Following widespread retweeting of my , research emerged yesterday that seems to confirm one of them with stats. In the first ever quantitative analysis of twitter, analysing a month's complete usage data, Haewoon Kwak et al, of South Korea's KAIST, have (big PDF):
I take this as provisional validation of thesis III and VIII for starters.
There's a slideshow and abstract of the research . The researchers write a summary paragraph whose last phrase deserves a lot more thinking about:
"We have crawled the entire Twittersphere and obtained 41.7 million user profiles, 1.47 billion social relations, 4, 262 trending topics, and 106 million tweets. In its follower-following topology analysis we have found a non-power-law follower distribution, a
short effective diameter, and low reciprocity, which all mark a deviation from known characteristics of human social networks."
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