Belmont Club

A.most Under Control

Nicolas Hastings at the Wall Street Journal asks, “Is the Euro Entering Its Dying Throes?”  How could something which only recently seemed so powerful and invincible be near collapse? But the captains of Europe are indisputably rushing to the bridge to craft an emergency plan, so the urgency is real. Seventeen finance ministers and the new head of the IMF are bound for an emergency meeting to figure out what to do in order to prevent the sovereign default contagion, once believed confined to Greece, from spreading elsewhere.

Europe’s member states “must start speaking with one voice,” said analyst Sony Kapoor, managing director of think-tank Re-Define. “Every new crisis headline fuels a further deterioration of the crisis and triggers more contagion.” …

“What we are witnessing, and will soon be suffering from, are the inept attempts by politicians and central bankers to duck the consequences of the financial crisis,” said analyst David Morrison at trading firm GFT.

“Now the crisis in Europe has escalated sharply and the rescue facilities currently in place are not robust enough to help. On top of that, the US recovery has fallen flat on its face.”

The recovery procedures in which the European financial system had reposed such faith have not only failed to stop the flooding but led to the discovery that there are leaks elsewhere. And that is worrying the senior European bureaucrats.

The trouble, according to the Globe and Mail, is that nobody understood the problem until now. The key difficulty, as the Germans have always guessed, is that bailing out Greece under any of a variety of guises will “lock in huge losses with unknown implications for Europe’s financial system”. It is now realized that bailing out Greece is only going to move the problem elsewhere.  The EU finance ministers are beginning to understand that there’s no way to easily isolate the problem. The debt loads of Italy, Spain and Portugal were not separable from Greece. They were ship-wide stresses that had to be summed, not considered by parts.  The New York Times reports that the EU ministers are now faced with the challenge of deciding who gets taken to the cleaners.

At their meeting in Brussels, the finance ministers outlined a range of options to reduce the burden on countries like Greece that have accepted bailout loans, including cutting their interest rates and extending loan maturities, as well as helping them to buy back their bonds trading in the market. That reflects a growing consensus that heavily indebted countries cannot afford their current obligations and need some relief to avoid being condemned to an endless round of austerity and no growth.

Crucially, however, the ministers left unresolved the continuing dispute over private sector sacrifice to help pay for a second bailout for Greece, and whether Europeans should run the risk of their rescue prompting ratings agencies to declare the country in selective default.

Such an outcome is opposed by the European Central Bank, which insisted on restating its position in the communiqué of euro zone finance ministers.

But Germany and the Netherlands have being pressing for substantial involvement by the private sector — something they see as essential if they are to sell the Greek bailout to skeptical voters at home.

Somebody must draw the short straw and take the hit so the rest can live on the rations remaining. But the question of who gets to take a one way walk in the snowfield to the diminishing chorus of “for he’s a jolly good fellow” is a hard one to answer. But there may be the unappreciated chance that it’s already too late to assign a sacrificial goat. If the problem cascades there’s a distinct possibility that all of Europe may take a hit.

How this can happen was illustrated in 1963 when  the USS Thresher was lost to a casecade of system failures. It happened without warning  on a test dive off the coast of Massachusetts with the tender Skylark  and Russian spy ships monitoring the sub’s evolutions from the surface.

7:54 A.M. Notifies Skylark that future references to his depth will be encoded–“half test depth,three quarters test depth,” and so on–because of the numerous Russian trawlers that cruise along the U.S. coastline. 8:09 A.M. Thresher is at one-half her test depth.

9:02 A.M. The submarine requests Skylark’s navigator to repeat a course reading.

9:03 A.M. The following message is received from Thresher “Experiencing minor problem. Have positive angle.” And then: “Attempting to blow.” Skylark’s telephone picks up the sound of air under high pressure as Thresher attempts to push sea water from her ballast tanks. Then there is silence. For the next ten minutes Skylark attempts to make contact with Thresher, but there is no reply.

9:17 A.M. Skylark receives a garbled message. It is mostly unintelligible, but it ends with the distinct and ominous words: “…test depth.” Thresher’s acoustic phone has remained open, and Skylark’s navigator, a veteran of naval combat in World War 11, is astounded by what follows. He hears the distinctive groans and clanks of a doomed ship. Thresher is breaking up.

The unexpected had overtaken the sub in those 14 minutes. A “minor problem” became an issue of survival for the Thresher.

After months of study, a naval board of inquiry concluded that a failure in a segment of the vessel’s internal piping system, probably in the engine room, was responsible. According to Admiral Grenfell, writing in the March, 1964, issue of the U.S. Naval Institute’s Proceedings, “The casualty must have occurred when the ship was at or near test depth, which subjected the interior to a violent spray of water and progressive flooding. In all probability, water and spray shorted, out vital electrical circuits, causing a loss of propulsion power. The Thresher presumably blew main ballast, started to rise, and began to sink. Shortly thereafter, she undoubtedly exceeded her collapse depth and plunged to the bottom.” Modern submarines rely heavily on power to propel them to the surface, especially from great depths. If Thresher’s nuclear reactor shut down because of the rupture and short-circuiting, she would have had only her auxiliary diesel system to churn the propeller. As the ship filled with water, the auxiliary’s power would have been insufficient to push Thresher toward the surface, and her ballast system was inadequate to offset the tremendous counter pressure exerted at great depth.

It is now suspected that an unforeseen lack of engineering data contributed greatly to her loss. Nobody realized that the standard ballast-blowing equipment would fail at the previously unheard of depths at which she operated. “The inability to blow the ballast tanks was later attributed to excessive moisture in the ship’s high-pressure air flasks, which froze and plugged the flasks’ flowpaths while passing through the valves. This was later simulated in dock-side tests on Thresher’s sister ship, Tinosa. During a test to simulate blowing ballast at or near test depth, ice formed on strainers installed in valves; the flow of air lasted only a few seconds. Air driers were later retrofitted to the high pressure air compressors, beginning with Tinosa, to permit the emergency blow system to operate properly.”

The problem facing Europe is that, like the Thresher,  they are operating in the region of what Donald Rumsfeld once called an “unknown unknown”. He said, “there are known knowns; there are things we know we know. We also know there are known unknowns; that is to say we know there are some things we do not know. But there are also unknown unknowns – the ones we don’t know we don’t know.”Europe thought it knew where it was. Now they understand that they don’t. Hence, the meeting.

Now Herman von Rompuy and Christine Legarde are treading where ‘no man has gone before’. They’ve been blowing the ballast for some time now with no result and are meeting in emergency executive session to figure out why the EU is still sinking. They may yet surface the boat. But then again they may not.

Almost Made It

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