Tuesday, May 22, 2012
May 22, 2012 Neither the Fed Nor the ECB Will Be Able to Stop What's Coming
- Gas being at $4 and food prices not far from record highs.
- This being an election year and the Fed now politically toxic.
- Growing public outrage over the Fed's actions (secret loans, etc.) in the past.
Labels: collapse, Crash, credit, Crisis Crash, Debt crisis, Default, Dollar, Euro Collapse, Euro crisis, Euro default
Thursday, March 29, 2012
Europe's Bazooka Will Fire Blanks... Good Luck Killing the Crisis With That
Europe continues to take a page out of Hank Paulson's "Crisis Combat" booklet, by unveiling one monetary "bazooka" after another. Obviously, EU leaders didn't notice that Paulson's "bazooka" completely failed to stop the 2008 Crash.
Even more strangely, they keep pulling out bazooka after bazooka, first unveiling the EFSF which was supposed to raise €1 trillion but failed to raise even €10 billion without having to intervene in its own bond auctions.
Then came the ESM, which was supposed to be another mega-bailout fund, which as before, is having trouble raising funds. After all, if one bailout fund is a dud, why would launching another fix anything?
Oh, and I forgot to mention that both bailout funds will be leveraged... which Europe obviously doesn't have enough of already (the EU banking system as a whole is leveraged at 26 to 1. Lehman Brothers was at 30-to-1 when it imploded).
Indeed, you don't even need to look at the math (though the math is impossible and makes the premise of "saving Europe" even more insane) to know that this can't work. Which is why the idea that the EU as a whole can create mega-bailout funds to put up a "firewall" around its banking system is outright absurd.
The EU is 27 countries. Of these, only 17 use the Euro. And these countries have a long, bloody history of political conflicts with one another. We've already seen hints of this with Germany calling Greece a "bottomless hole" to which Greece responded by portraying German politicians as Nazis.
Spain, France, and the others aren't exactly the best of friends either. And as their respective economies collapse at varying speeds (even Germany posted negative QoQ GDP for 4Q11), political tensions will rise even more rapidly.
So in the end, Europe's bazookas will be firing blanks (assuming they even can fire at all, which their respective efforts to raise capital call into doubt). Which brings me back to one of my central themes for Europe: that you cannot band together such disparate economies and cultures in one monetary union and expect it to work.
Again, this is common sense. And when we add in the math, it becomes even more clear just how insane these political proposals are.
Consider Germany, for instance. As I've noted for months now, that country sports a REAL Debt to GDP of 200% (from former Bundesbank officials' own admissions) when you include unfunded liabilities. And Germany is somehow going to bailout Italy or Spain (which both sport REAL Debt to GDPs north of 300%)?!
Again, the whole thing is absurd. The entire European financial system is just one big house of cards, propped up by the hopes that the ECB can hold this thing together.
But it can't. Europe isn't the US. And the ECB isn't the Federal Reserve. What I mean is that you can maybe fool investors into believing that a financial system is fixed if you're only dealing with one country and one Central Bank. But when you're dealing with 17+ countries, many of which have their own national Central Banks, and you're trying to save this system with a larger regional Central Bank (the ECB) the whole thing is impossible.
Indeed, because of its interventions and bond purchases, the ECB's balance sheet is now PIIGS debt AKA totally worthless junk. And the ECB claims it isn't going to take any losses on these holdings either. No, instead it's going to roll the losses back onto the shoulders of the individual national Central Banks.
How is that going to work out? The ECB steps in to save the day and stop the bond market from imploding... but the minute it's clear that losses are coming, it's going to roll its holdings back onto the specific sovereigns' balance sheets.
So... PIIGS debt is essentially just a monetary "hot potato" that the various Central Banks in Europe are tossing around? And this is supposed to save Europe? Good luck with that.
On that note, I fully believe the EU is heading into a Crisis in the May-June window of time. We have a confluence of negative factors (monetary, political, technical, etc.) hitting during that window of time, which is unlike anything I've ever seen before. And unlike the 2008 Crisis, the Central Banks won't be able to rein this one in.
Why? Because Europe's banking system is $46 trillion in size. And the Fed and ECB are already leveraged to the max having spent all their ammunition combating the Crisis this far.
Labels: Collaps, Crash, crisis, Default, Euro Collapse, europe, Greece
Monday, March 26, 2012
A Tenuous Balance is in Place
The markets will likely try to rally this week based on the following items:
1) End of quarter performance gaming
2) Last week's weak stock performance
3) Angela Merkel signaling that Germany will increase the pointless "firewall" around Europe's banking system
4) Bernanke's hint that more QE is coming in April in this morning's speech
#1 is a regular phenomenon in the markets and needs not be explained. #2 is closely tied in with the latest policy of verbal intervention on the part of the Fed: any time stocks weaken some Fed official, usually Charles Evans of Chicago or Bill Dudley of New York, gives a speech suggesting more easing is just around the corner and VOOM! stocks take off again.
#3 is just the next step in Germany trying to hold the EU together long enough to see how the French elections turn out in April/ May. Given that Merkel's political ratings drop like a stone any time she spends more German money and explode higher any time she plays hardball with the EU, we can take this move to be mainly posturing and playing for time.
Indeed, France is now a wildcard in the great EU bailout scheme. Most polls show a socialist winning in the second round of the elections. And not just any socialist, but François Hollande.
A few facts about Hollande:
1) He just proposed raising tax rates on high-income earners from 41% to 75%.
2) He wants to lower the retirement age to 60.
3) He completely goes against the recent new EU fiscal requirements Merkel just convinced 17 EU members to agree to and has promised to try and renegotiate them to be looser.
So Merkel knows that if Hollande wins in France, her campaign to turn the EU into a fiscally responsible German-led group of colonies will be over. Europe could very well collapse before then as the Spanish and Italian bond markets are flashing danger signs again (despite the world believing LTRO's 1 and 2 solved everything). And the facts remain that the entire EU banking system is a disaster waiting to hit (anyone notice that EU banks continue to park cash at the ECB like there's a systemic catastrophe looming?)
Finally, Bailout Ben Bernanke just hinted at more QE in his speech at the National Association for Business Economics this morning. With gas prices at $4 and food prices not far off from their all time highs, I cannot see how Bernanke can possibly unveil more QE without unleashing major political outrage and destroying Obama's chances at re-election (Obama did re-elect Bernanke as Fed Chairman).
So I view this hint as more posturing from Bernanke. He likely is aware that seasonal adjustments have made all economic data from the last three months look better than reality and is simply trying to prep the markets for what's likely going to be a slew of bad data started in 2Q12. We also have to note that stocks took it on the chin last week, so Bernanke could very well be maintaining item #1 on the list above: verbally intervening to keep the markets up.
Big picture: the markets are being held together via a very tenuous balancing act on the part of EU leaders and the world Central Banks. The short-term bias will be bullish due to the factors listed above. But big trouble is lurking just beneath the surface. And should anything upset the current balance being maintained, we could see some real fireworks in the markets in short order.
Labels: collapse, Default, disaster, Euro Collapse, Euro crisis, France crisis
Thursday, March 15, 2012
The Big Fat Greek Lie Is Now Obvious to Spain... So Who's Next to Default?
The big fat Greek lie being spread throughout the financial community is that "Greece has been saved". It's a lie for the following reasons:
1) Greece did in fact default.
2) Greece now has more debt than it did before the bailout (how does writing off €100 billion Euros in debt and taking on €130 billion Euros in more debt improve this situation?)
3) The Greek economy continues to implode (youth unemployment over 50%, one in ten Greek youth looking for jobs abroad, Greek GDP fell 7% in 4Q11)
4) This Second Bailout was indeed a "Credit event" which the markets have yet to discount (though German investors are already lining up litigation)
5) Germany's finance minister has already admitted Greece may need a third bailout.
Anyone who thinks that Greece is better off, let alone "saved" is out of their minds. The Euro may have been saved for a few more weeks/ months. But Greece is in worse shape than ever.
Indeed, if anything, the Greek situation has made it clear that the whole "give up fiscal sovereignty and implement austerity measures in exchange for bailouts" formula is a waste of time and money. Let's take a look at the progression here.
1) Greece claims it doesn't need a bailout at all (January 2010-March 2010)
2) Greece begins to ask for a bailout (April-May 2010)
3) Greece gets a bailout equal to 57% of its GDP (May 2010)
4) Greece posts a GDP of -4% in 2010
5) Greece announces it won't be able to meet budget requirements/ payback the first bailout on time and asks for an extension (January-February 2011)
6) Greece asks for another extension (May 2011)
7) Talk of Second Greek Bailout begins (July -October 2011)
8) Greece posts a GDP of -6.5% in 2011
9) Second Greek bailout announced/ finalized (February/March 2012)
10) Talk of third Greek bailout begins (March 2012)
No other EU country could look at this progression and think "this looks like a good approach." Indeed, Spain and Italy must be watching what's happening in Greece and asking themselves whether they want to go through this whole process of negotiating for bailouts via austerity measures or not?
Labels: Crash, crisis, Debt crisis, depression, Euro Collapse, Greece, Greece bailout
Friday, March 09, 2012
Mr. Market: Get It Through Your Head, The PSI DOESN'T Matter
I don't know how many times I have to say this, but I'm saying it again.
Greece and the Euro are finished. The math is impossible. There is no way on earth that this Second Bailout accomplishes anything worthy of note. The idea that this country will somehow return to economic growth within two years, based on an additional €130billion in bailouts is outright insane.
Remember, Greece already received €110 billion in bailout funds in 2010... and still posted GDP growth of -4.5% in 2010 and -6.8% in 2011. Greece's economy is only €227 billion, so the country failed to post any economic growth and in fact saw its economic collapse accelerate after receiving a bailout equal to 57% of its GDP!!!
And somehow another 130€ billion is going to get this country back to economic growth in two years' time? Greece hasn't experienced any growth in five years.
Again, this entire deal is just stupid. And all it's done is alert Spain and Italy to the fact that handing over fiscal sovereignty and implementing austerity measures in exchange for bailouts is a waste of time.
As I wrote several weeks ago:
Meanwhile, on the other side of EU equation, Spain and Italy must be watching what's happening in Greece and asking themselves whether they want to go through this whole process of negotiating for bailouts via austerity measures.
Both countries have already had a small sampling of the austerity measure medicine. Spain recently implemented a meager 19€ billion in austerity measures while Italy passed 30€ billion in austerity measures in 2011... hardly a drop out of their respective 1.06€ trillion and 1.5€ trillion economies.
Yet, even these tiny moves resulted in protests and riots. One can only imagine what Spanish and Italian politicians are thinking as they witness the widespread civil unrest, country-wide strikes, and economic depression that have occurred in Greece as a result of that country's full commitment to the EU's austerity measure demands.
Spain's official Debt to GDP is only 64%, but its private sector debt is at an astounding 227% of GDP. And the Spanish banking system is leveraged at 19 to 1 (worse than Greece).
Moreover, the country is already experiencing an economic Crisis with an unemployment rate of 20+% and an economy that has been contracting since mid-2011 (in fact Spain's GDP just actually went negative in the first quarter of 2012)...
So... we must consider that it is highly likely the option of simply defaulting is being discussed at the highest levels of the Spanish and Italian government. Should either country decide that austerity measures don't work and it's simply easier to opt for a default, then we are heading into a Crisis that will make 2008 look like a joke.
Well, Spain just woke up and smelled the coffee:
Spain's sovereign thunderclap and the end of Merkel's Europe
As many readers will already have seen, Premier Mariano Rajoy has refused point blank to comply with the austerity demands of the European Commission and the European Council (hijacked by Merkozy).
Taking what he called a "sovereign decision", he simply announced that he intends to ignore the EU deficit target of 4.4pc of GDP for this year, setting his own target of 5.8pc instead (down from 8.5pc in 2011).
In the twenty years or so that I have been following EU affairs closely, I cannot remember such a bold and open act of defiance by any state. Usually such matters are fudged. Countries stretch the line, but do not actually cross it.
With condign symbolism, Mr Rajoy dropped his bombshell in Brussels after the EU summit, without first notifying the commission or fellow EU leaders. Indeed, he seemed to relish the fact that he was tearing up the rule book and disavowing the whole EU machinery of budgetary control.
So... if you still think the Greek PSI matters in any way, you're not thinking past the next 24 hours. Spain has just told the EU to "shove it." Having seen Greece enter a depression and get pushed around by Germany and France for two years, Spain's just told the EU that it's not going that route.
So... if Greece, whose economy is roughly the size of Massachusetts, nearly took down the European banking system... what do you think will happen when Spain decides to it doesn't want to play ball and would rather just default.
Hint: It will be Lehman times ten.
Labels: Crash, Crisis Crash, Default, depression, Euro Collapse
Thursday, February 23, 2012
Fearless Prediction: On March 20, Greece Will Default
Of course, Greece doesn’t have €14.3 billion—that’s why the Troika of the IMF, the EC and the ECB are trying to hammer out a deal to bail them out again: A bailout to the tune of €136 billion. They’ve had marathon-length negotiating sessions, one “crucial emergency meeting” after another—hell, they even called the Pope to send them a case of holy water and a truckload of wooden stakes. I’m serious!
Last Monday, a deal seemed to have emerged: That’s what the announcement sounded like. In fact, it looked so much like a done deal—it was spun so decisively as a done deal—that I was all set to write something snarky like, Greece Takes It Greek Style: “Thank You Troika, May I Have Another” Bailout On Its Way. (What can I say: I’m a vulgar bastard.)
But then . . . then we all started looking at the fine print of the deal. And that’s when everyone who follows this stuff started to realize that the deal wasn’t a deal—merely the illusion of a deal.
A motto of mine: Never try to do the work someone else has already done for you. In the case of analyzing the Greak “deal”, I turn to John Ward, who pretty much nailed the critique of the deal:
1. [A]lthough the ECB has made a reasonable fist of complicating its subordination of the private bondholders – money out, profits redistributed, local central banks reinvesting and so forth – it remains a preferential deal done outside this so-called ‘bailout with PSI’. The IIF creditors have sort of voluntarily taken the extra 3.5% hit, but the coupon they’ve been offered is worth less than the original. In a statement issued by representatives of private bondholders, the new interest rates – 2% for the first three years, 3% for the next five, and 4.2% thereafter were described as “well below market rates”, and the creditors will lose money on them. The tone of the statement screams ‘involuntary’. In English, all these factors spell default.John Ward nails the essence of the Greek deal: There is no Greek deal—just the illusion of one.
2. Nobody has actually signed up to anything yet: as usual with all things EuroZen, the bankers are alleged to be on-board, but the IIF statement made after the press conference suggests otherwise: ‘We recommend all investors carefully consider the proposed offer, in that it is broadly consistent with the October agreement’. That’s not true for one thing: but as a recommendation, it’s somewhat limp. Further, there is still a body of hardline ezone sovereigns who don’t want to do the deal – and in Germany itself, a growing rearguard campaign to stop it. (See this morning’s Spiegel for immediate evidence). And finally, most Greek citizens themselves will react violently to some of the more pernicious clauses.
3. The ‘agreement’ contains almost a full bottle of poison pills: Berlin has got its debt Gauleiters in the end, only 19 cents on the euro will go to the Greek Government itself, 325 million euros in additional spending cuts have been found, Athens has agreed to change its constitution to make debt repayment the top priority in government spending, the escrow account must have three months debt money in it at all times etc etc. The idea that Greece can now toddle off and have a liberal democratic general election without any of these being issues is Brussels space-cadet stuff at its most tragi-comic. (An opinion poll taken just before the Brussels deal showed that support for the two Greek parties backing the rescue package had fallen to an all-time low while leftist, anti-bailout parties showed gains.)
4. Several Grand National leaps lie ahead before the default is avoided. Parliaments in three countries that have been most critical of Greece’s second bailout – Germany, the Netherlands and Finland – must now approve the package. In Greece itself, further violence will test political resolve about yet more cuts in wages, pensions and jobs. Greece’s two biggest labour unions have already lined up protests in the capital tomorrow. Very significantly, Jean-Claude Juncker of Luxembourg and the IMF’s Christine Lagarde stressed at the press conference that Greece still had to live up to a series of “prior actions” by the end of the month before eurozone governments or the IMF can sign off on the new programme. If ever I saw a get-out clause, that’s it.
5. Other loose ends are left hanging everywhere. Nobody has elicitied any response so far from the Hedge Fund creditors. Entirely absent from comments was the IMF’s contribution to the €130bn bail-out. Christine Lagarde would say only that the contribution would be ‘significant’, but my information is that she’s lying through her $240,000 teeth as usual: the IMF will only contribute €13bn to the in new Greek funding. Not exactly a resounding vote of confidence for the deal. Juncker said he was optimistic that ezone members would cough up more cash at the EU summit in March, but this too simply doesn’t bear examination: Portugal is broke, Spain is technically insolvent, Italy has asked to be excused from this dance, and Germany has already shown extreme reluctance to to increase its exposure further still. Fritz Schmidt in dem Strasse isn’t too keen either. Finally, as Bruno Waterfield notes in his latest column at the London Daily Telegraph, the agreement remains ‘overshadowed by the pessimistic debt sustainability report compiled by the IMF, ECB and Commission, that warned of a “downside scenario” of Greek debt hitting 160 per cent of GDP in 2020 – far higher that the agreed 120.5 per cent target’.
6. This is where we get to what the MSM will largely dismiss as ‘conspiracy theory’….but for which the circumstantial and corroborative evidence gets increasingly compelling: whole crowd-scenes of actors off-stage (and several on it) simply do not want this deal to reach fruition: they have factored in a Greek default, and believe that the best way to avoid further debt-crisis contagion is for the money earmarked for bailouts to be invested in bank-propping and growth.
The cast of players who think this include David Cameron, Mario Monti, Mario Draghi, Wolfgang Schauble and most of the German Finance ministry, Christine Lagarde, probably Angela Markel herself, Tim Geithner, huge swathes of the German banking community, The White House – and elements in both Beijing and Tokyo.
( Emphasis added.)
My only quibble with Mr. Ward is his point 6.: He writes that “whole crowd-scenes of actors off-stage (and several on it) simply do not want this deal to reach fruition”, which I think is accurate—but not for the reason Mr. Ward posits: I think the eurocrats have given up on Greece not because they “believe that the best way to avoid further debt-crisis contagion is for the money earmarked for bailouts to be invested in bank-propping and growth,” as Mr. Ward writes.
Mr. Ward is making a smart financial analysis of the situation. But the big decisions in macro-economics are never financial: They are always political—always. And politics is ultimately about psychology.
I think the eurocrats won’t bail out Greece not because they believe letting Greece default is the best way to avoid contagion: No, I believe the eurocrats will let Greece default because they no longer trust the Greeks or the Greek leadership.
Trust is like virginity: Once you lose it, it’s gone for good. Add to that truism a basic observation: If two parties truly want to make a deal happen, then the deal happens as if it’s on rails.
The key players of the Troika and the eurodrones generally just don’t trust Greece anymore. The Greeks have burned through that particular capital a long time ago. And by the passive-aggressive negotiation style of the eurocrats, they’re making it crystal clear that they do not want a deal with Greece. If they truly wanted a deal, it would’ve happened by now.
They don’t want a deal because the eurocrats and Establishment drones charged with saving Greece—for all their obvious flaws—are neither stupid nor blind: They realize that Greece is in all likelihood a never-ending hole. Whatever deal they hammer out now, they’ll have to hammer out yet another bailout package in 12 to 24 months’ time.
They realize—even if they don’t want to or can’t articulate it—that saving Greece is simply throwing good money after bad.
So they won’t. They will let Greece default. And the way they will do that is by demanding such egregious conditions—such as giving up Greek sovereignty—that Greece will refuse the bailout, or get locked into more and more negotiations, until March 20 finally rolls around.
Then it’s game over for the Greeks: They will default, exit the eurozone, go to the drachma, devalue, and go through hell for a few years.
It has now become too expensive—financially, politically, psychologically—to save Greece. The holes in the Monday deal show that there is no deal—and there won’t be any deal.
So on March 20, Greece defaults.
Now . . . if Greece defaults . . . then what about the rest of the eurozone?
Ahhh : That is the real question.
Labels: Crisis Crash, Default, Euro Collapse, Euro finished, Greece
Thursday, February 16, 2012
Greece is Not Lehman 2.0... As I'll Show You, It's Far Far Worse...
Investors simply do not understand the significance of Greece. Comparisons are being made to Lehman, but these comparisons are moot for the following reason: Greece is a country not a private institution.
This is not a subtle difference. True, Lehman's derivatives were spread throughout the global financial system just as Greek sovereign debt is. However, investors are missing the true scope of the fall-out a Greek default would create.
First, let's think about Lehman. When Lehman went under, half of the other institutions that were in trouble had already been merged with larger entities (Bear Stearns, Merrill Lynch) or had been nationalized (Fannie and Freddie). Those that were still standing after Lehman went under, changed to bank holding companies (Morgan Stanley, Goldman Sachs) in order to receive special access to Fed lending or were nationalized (AIG).
None of these options exist regarding the sovereign crisis in Europe today. If Greece defaults, Portugal can't merge with Spain. And Italy can't be nationalized by Germany or suddenly change itself to a new type of country that gets special treatment from the ECB (it's already getting special treatment from the ECB by the way).
This cuts to the core issues for sovereign defaults in the EU. Here are the facts regarding those EU countries on the verge of collapse:
1) You cannot solve a debt problem with more debt
2) Austerity measures slow economic growth which in turn makes it harder to meet debt payments
This is simple basic common sense. But these are the policies being promoted by EU leaders: we'll give you more money if you implement more austerity measures to get your finances in order. (Stupidity!)
The fact of the matter is that there is simply no way on earth that Greece can get its finances in order (short of a massive default). Greece has terrible age demographics, a lack of economic growth, and cultural issues (e.g. paying taxes is for suckers) that make it impossible for the country to solve its financial problems.
In plain terms, Greece racked up too big of a tab and simply doesn't have the means of paying it. End of story. The world needs to realize this. Because Greece will default and it will default in a big way!!!
The impact of this will be tremendous. For one thing, pretty much everyone is lying about their exposure to Greece. Consider Germany for instance. According to the Bank of International Settlements German bank exposure to Greece is only $3.9 billion (though they state this is only on an immediate borrower basis).
This is a bit odd as according to The Guardian German banks have nearly 8 billion Euros' worth of exposure to Greek debt. And they only include 11 German banks in their analysis. However, of those 11 banks, THREE of them have Greek exposure equal to more than 10% of their total outstanding equity.
But even these numbers are far below the mark. By my own analysis one of the "strongest" banks in Germany alone, by its own admission, has twice the exposure to Greece that the Guardian claims. And this is one of the strongest banks in Germany.
So, when Greece defaults, the fall-out will be much, much larger than people expect simply by virtue of the fact that everyone is lying about their exposure to Greece.
Secondly, when Greece defaults, the other PIIGS (Italy, Ireland, Spain, and Portugal) will have to ask themselves... "do we opt for austerity measures and more debt which obviously didn't work for Greece and will only stifle our economies more? Or do we also default?"
That's a very tough question to answer. But I'd wager more than one of them will opt for default. And if you think European bank exposure to Greece is understated, you don't even want to know how bad exposure to Italy and Spain is (to give you an idea, the German bank I referred to earlier, again by its own admission, has total PIIGS exposure equal to 60% of its equity)!
Folks, the European banking system is literally on the edge of the abyss. This won't be Lehman 2.0. This is going to be something far, far worse. Some of these countries are already sporting unemployment of 20%. What happens when their largest banks go under?
Also, remember that the EU is:
1) The single largest economy in the world ($16.28 trillion)
2) China's largest trade partner
3) Accounts for 21% of US exports
4) Accounts for $121 billion worth of exports for South America
The global impact of an EU banking Crisis will be tremendous. And it's clear the EU is already heading into a recession without a banking crisis hitting. What do you think will be the impact when Europe as a whole experiences its own "2008" only on a sovereign level?
The answer is: we are literally on the eve of a Crisis that will make 2008 look like a picnic.
On that note, if you have not already taken steps to prepare for the next round of the Crisis now is the time to do so while the system is still holding together.
Labels: Collaps, Crash, crisis, Default, Euro Collapse, Euro crisis
Friday, February 10, 2012
Greece has No Idea What It's Gotten Itself Into
The Greeks have no idea what they've gotten themselves into.
A few facts about Greece...
First off, demographics wise, Greece is a disaster.
Real Clear Markets shares the following facts.
- Greece's fertility rate is 1.3 children per women. This is nearly a full child below the "replacement rate": the number of children needed to maintain the current population.
- Greece's population of 65 and over has soared from 11% in 1970 to 24% in 2010. It will hit 33% by 2050. Meanwhile, Greece's working population will decline to 20% over the same time period.
- Because of this, Greece spends 12% of its GDP on pensions.
As if this weren't bad enough, the unemployment rate for Greeks aged 15-24 is 40%. For Greeks aged 24-34 it's 22%. Imagine being a young person, not being able to find a job, and then knowing that huge percentage of your efforts (42%) are going to be taxed to fund all the crazy social welfare programs for Greece's aging population. Small wonder that seven out of ten young Greeks want to work abroad and four of out ten are actively seeking work outside of Greece.
Also, it's no surprise that those Greeks who do have jobs, don't want to pay this massive tax load. Consider that the Greek working population is roughly seven million people. 95 percent of them declare annual income of less than 30,000 euros.
So that's the situation in Greece. Terrible age demographics, an economy that's in the toilet, and politicians who simply don't get it.
Now let's consider who's actually got the cash to potentially help Greece from a default, and what they want in return.
We're talking about Germany.
For most of the Greece Crisis, the supposed "saviors" were the IMF, the ECB, and Germany. That all changed in the last month. The IMF has called for more funds. Those funds aren't coming. Remember, the IMF is largely a US-backed organization. And the US sure as heck won't go for a US-backed bailout of Europe.
So the IMF is out of the picture in terms of helping Greece in any meaningful way.
Now, how about the ECB? Well Germany has told the ECB to its face that if it continues to monetize EU sovereign bonds that Germany will walk out on the Euro. So the ECB may continue to meddle in the bond market to avert a Crisis, but if it ever decides to publicly state it will be monetizing EU debt going forward, Germany's out and the Euro implodes.
Which leaves Germany as the official backstop/ savior for Greece. And here's how Germany recently address the IMF when the IMF asked Germany for help with the Greek situation.
Berlin resists pressure to give Greece more
Germany, the biggest and richest country in the euro zone, has provided the bulk of the funds for the bailouts of Ireland, Portugal and Greece. Now it is firmly rejecting calls to come up with yet more funds for Greece to compensate for any shortfalls in a debt relief deal with private creditors.
On Friday Foreign Minister Guido Westerwelle defended Berlin's tough stance. The Greeks, he insisted, should show that they are willing to implement reforms before getting more money.
"We Germans do not expect from anyone in Europe more than what we are asking from our own citizens. We cannot explain to taxpayers in Germany that they have to do things that others do not want to do while at the same time asking for their money," Westerwelle said in Brussels.
He pointed out that Germany had already come up over 200 billion euros ($262 billion) for the bailout funds. "It makes no sense" he said, to give more money to Greece, "if we don't know whether the reforms which have been agreed upon will be really implemented." He argued that coming up with more money just lessened the pressure to reform.
http://www.globalpost.com/
Diplomatically, this is about as close as Germany can come to telling the IMF to "stuff it." Germany knows the IMF doesn't have the funds and won't be getting them (the IMF is primarily a US-backed entity and the US won't stand for a US-backed European bailout).
Indeed, just a few days after Germany said "nein" to more Greece bailouts, it then threw the following suggestion out:
German proposal seeks EU commissioner with sweeping powers to directly control Greece's budget
Germany is proposing that debt-ridden Greece temporarily cede sovereignty over tax and spending decisions to a powerful eurozone budget commissioner before it can secure further bailouts, an official in Berlin said Saturday.
The idea was quickly rejected by the European Union's executive body and the government in Athens, with the EU Commission in Brussels insisting that "executive tasks must remain the full responsibility of the Greek government, which is accountable before its citizens and its institutions."
http://www.washingtonpost.com/
In plain terms, push has now to come shove in Europe. Germany permitted the ECB to implicitly monetize various EU sovereign nations' debts during 2011 because Germany hadn't yet taken the steps to prepare for a collapse of the EU.
It now has. In the last six months, Germany has:
- Passed legislation permitting it to leave the Euro without leaving the EU.
- Passed legislation permitting it to nationalize German banks during times of Crisis.
- Demanded that German banks in general raise capital.
In plain terms, Germany is now prepared to walk away if it has to. And it's made its demands very clear: if you want German funds, you will need to give up fiscal sovereignty.
It's also made it clear that it will tolerate neither the issuance of Eurobonds OR direct and open monetization by the ECB.
In other words, Germany has said "it's our way or the highway." True, this borders on an act of financial warfare, but in the end, Germany has never truly been interested in a monetary union so much as a political union.
Germany will not suffer inflation (they've seen how monetization works out, e.g. Weimar), nor internal discord (in November 78% of Germans thought the Euro would survive... by December 60% of them though the Euro was a "bad idea".)
Put another way, if Greece wants to remain Greece it's no getting any more funds and its bond markets will implode. The alternative is that if Greece wants German funds, it's going to have to give up its fiscal sovereignty and essentially become a vassal state for Germany. End of story.
With that in mind, I believe the next round of the Euro Crisis is now at our doorstep. Indeed, this latest short-covering rally in the Euro (Euro shorts were at a record high) looks ready to end and reverse.
So if you think the EU Crisis is over, think again. True we've got until March 20th for the Greek deal to be reached, but things have already gotten to the point that Germany has essentially issued its ultimatum. Either Greece hands over fiscal sovereignty, or it defaults in a BIG way.
Labels: Crisis Crash, Default, Euro Collapse
Wednesday, January 18, 2012
Germany's Fed Up and Getting Ready to Walk
The reasons for this are simple:
1) The German public and court system won't stand for QE from the European Central Bank
2) Issuing Euro bonds goes against the German constitution
3) Germany has its own share of domestic problems with a REAL Debt to GDP ratio north of 200% and its banks needing tens of billions of Euros in new capital
All of these factors lead me to believe that Germany would refuse to be the ultimate backstop for the EU. You could also see Germany preparing the legislation to allow it to walk if it wanted to:
German Chancellor Angela Merkel's Christian Democratic Union party voted to allow euro states to quit the currency area, endorsing the prospect of a move not permitted under euro rules.
The resolution reads:
"Should a member [of the euro zone] be unable or unwilling to permanently obey the rules connected to the common currency he will be able to voluntarily--according to the rules of the Lisbon Treaty for leaving the European Union--leave the euro zone without leaving the European Union. He would receive the same status as those member states that do not have the euro."
I believe Germany implemented this legislation for itself... not some other country. And by the look of things, Germany's getting a lot closer to walking.
BBK Thiele: Current ECB Government Bond Buys Violate Treaty
The European Central Bank's government bond buys are a violation of the Maastricht Treaty, Bundesbank board member Carl-Ludwig Thiele said Monday.
Thiele's comments depart form the official Bundesbank line. While the German central bank has warned that larger purchases may be illegal, it has said that current purchases do not violate the prohibition of monetary financing.
Thiele recalled that the decision to buy Greek government bonds had found no support from German ECB Governing Council members. "Germany was over-ruled on the Council," Thiele said.
"These buys were a violation against the prohibition of monetary financing, that is the basic principle that a central bank should not give credit to a state," Thiele said in a speech text provided by the Bundesbank.
Bundesbanker says euro zone must forget idea of QE
Europe must abandon the idea that printing money, or quantitative easing, can be used to address the euro zone debt crisis, Bundesbank board member Carl-Ludwig Thiele said on Monday.
Thiele called for euro zone countries to exercise fiscal discipline and said that boosting the resources of Europe's rescue funds would buy time to address the bloc's debt woes.
"But lasting confidence cannot be bought with money alone," he added in the text of a speech for delivery in Hamburg.
"One idea should be brushed aside once and for all - namely the idea of printing the required money. Because that would threaten the most important foundation for a stable currency: the independence of a price stability orientated central bank."
These are extremely strong statements coming from the Bundesbank. Remember, Merkel is the German political leader, but she doesn't control the purse strings to Germany: the German courts and Bundesbank do. And if they don't support more bailouts, there's nothing Merkel can do.
We see similar warnings coming out of German CEOs:
Linde CEO says Germany should mull euro exit-paper
Germany should consider leaving the euro if efforts to impose fiscal discipline upon indebted euro zone countries fail, the head of industrial gases firm Linde (LING.DE) told German weekly paper Der Spiegel.
"I fear the willingness of crisis countries to reform themselves is abating if, in the end, the European Central Bank steps in," Linde's chief executive Wolfgang Reitzle was quoted as saying.
"If we do not succeed in disciplining crisis countries, Germany needs to exit," said Reitzle who was previously a board member at carmaker BMW (BMWG.DE) and head of Jaguar and Land Rover.
http://in.reuters.com/article/
I firmly believe Germany is already makings moves to prepare for precisely this outcome. No EU member state is going to submit to German authority regarding fiscal policies. Indeed, virtually every EU legislation passed in the post-WWII era was aimed at limiting Germany's power.
And Germany isn't going to simply prop up the EU out of the goodness of its heart. As I mentioned before, Germany has its own domestic issues to deal with. And when push comes to shove, Germany will look after its own interests rather than Greece's or Italy's.
With that in mind I believe it's only a matter of time before Germany walks out of the EU. When this happens the Euro will collapse a minimum of 20-30% and we will see numerous sovereign defaults.
When the smoke clears the EU in its current form will be broken and we will have passed through a Crisis far worse than 2008.
Many people see their portfolios go up in smoke with this. Don't be one of them. The time to prepare your portfolio for the collapse is NOW before it starts.
Labels: Crash, Default, Euro Collapse, Euro crisis
