Euro-Sclerosis Will Spread

Wednesday, March 03, 2010

Europe has reached the modern day version of the 7 plagues.
  1. Hurricanes, snowstorms and floods are ravaging France, Germany Portugal (Madeira) and the UK, creating new billion bills to rebuild the damaged infrastructure.
  2. Strikes and protests shake the streets of Greece, Spain, Italy, Germany, Belgium.
  3. Fiscal deficits balloon to historically unprecedented levels.
  4. Unemployment remains at the 10% level (and no EU member counts them properly!)
  5. Demographics worsen with every day and Europe will collapse under 100 million pensioners in this decade.
  6. There are NO signs for economic improvement anytime soon.
  7. We haven't seen anything of the banking crisis yet in continental Europe and yields WILL rise due to higher risks.
Except for the natural disasters and demographics central and commercial banks are responsible for all other crises listed above.
I have lost count how often I heard the promise of an upcoming solution to the financial crisis that  now mutates into a prolonged economic slump. Browsing this blog's archive for official statements I am unable to find one single admission of guilt - or at least error - by a member of the banking industry or supervisory authorities.
Since August 2007 banksters have been busy telling the rest of the world that consumers should not worry as the crisis would be contained.
Since August 2007 they have been wrong.

Whether this was out of greed or because they lacked better knowledge is of no concern.
This incompetence will have cost millions of existences in the end. Count the "shop/office for rent" signs on your commute once a week and you will develop a mental realtime graph about the speed of economic deterioration.

The Great Cheat
The crisis has not been contained but banks were showered with cheap credit from the European Central Bank (ECB) which adopted US style ZIRP (zero interest rate policy) to allow banks to borrow below inflation. Normally, this is for a bank like taking steroids without a side effect. Money for nothing: A dream come true for the most privileged of all privileged economic sectors. The last time Europe saw 1% interest rates must have been before the invention of charts.
But back to the Great Cheat: As it has turned out, Greece cheated to become a Euro member (with the help of Goldman Sachs.) As was the case with Bernie Madoff and whistleblowers futile attempts for 9 years to bring him to justice, the EU refused to notice warnings by European statistics office Eurostat ahead of Greece joining the Euro.
New allegations include Goldman Sachs and Italy as partners in fiscal crime.
We may indeed witness the breaking point of the Euro which currently hovers at 2010 lows. Heralding the theory that price/yield is the most important information in markets, the following graph shows that markets reflect the greed/fear thermometer very well.

GRAPH: Greece lied - and immediately got punished by bond markets with no end in sight. Since Greek manipulation of economic data become public its government jets the world to find refinancing for some €20 billion of government bonds becoming due in H1 2010. Chart courtesy of John Mauldin who has a lot more interesting data on 11 of the 16 Eurozone members here. By the way, Belgian debt appears to be overpriced taking into account that the political heart of Europe is entangled in a perpetual secessionist brawl along French/Flemish language borders.
Any political bailout solution for Greece would be a violation of the Lisbon Treaty. The ECB itself is a Eurozone controlled central bank but there are no guarantees behind it. Paid up capital for the ECB's experiment called Euro is €4 billion, divided proportionally among the members.

Pan-Europe Will Remain a Pipe Dream
2 decades of unification policy may get thrown out in the next few months. A look back into history produces enough evidence that nationalism always has its heydays in economic slumps.
Greece's recent venomous attack about the gold stolen by Nazi Germany in WW2 in the bailout talks is a tell-tale of what all Pan-European promoters neglect: With the exception of neutral Portugal and collaborating Mussolini-Italy theoretically all desperate EU members could re-open discussions on war damage reparations, throwing the continent back into the chaos of countless wars that dominated it until 1945. This issue has been ignored 65 years ago as it was unbearable reparation payments that crippled Germany after WW1 and led to the rise of Hitler after the fall of the hyperinflationary Weimar republic. I presume mankind does not want to go that way again...
At the current status quo - Europe being plainly in denial about the coming wave of sovereign defaults - political action has reduced itself to repetitive squabble, unmasking a blatant lack of understanding ongoing global shifts where power and money moves from West to East.
First strikes like in France's Total refineries demonstrate the potential fragility of Western lifestyle with a 10-day fuel reserve for Le Grand Nation. I have repeatedly warned about possible food supply disruptions. That could start with an empty car tank in front of your house. Greek car drivers can tell their stories of queuing for gas in Europe by now.

A Continent Fed Up With Banker's Bonuses
Burning cars from Athens to Berlin and Paris have had an effect. EU politicians finally wake up to see angry citizens fed up from a two and a half year diet of unlimited money for banks and bankers that begins to hit home hard.
Hungarian EU Commissioner for Social Affairs, Laszlo Andor, warned of social tensions last Monday in Brussels and picked out Austria as another irresponsibly acting Eurozone member hiding the true dimensions of a debt collapse of its CEE banking empire while burdening taxpayers with ever more debt. But more on that in my next post.
The rest of Europe's leaders spend their time conference jetting. I have lost count whether I have been promised a solution for 2 or 3 weeks by our political and monetary high leaders in Brussels and Frankfurt now but parsing latest news headlines leaves me still waiting.
The continuously incoming bad macro data feed from Eurostat does nothing to instill hope into a self-recovery as rising long term unemployment has been reducing millions of EU citizens from consumers to receivers of a few breadcrumbs left over in nation's depleted coffers.
A stream of high level meetings of G7, G8, G20, Eurozone finance ministers, EU finance ministers, a group of 24 central bankers has yielded little in agreement and nothing in action in the last 4 weeks.
This time the imploding UK, fearing a crash of the pound, is the roadblock for EU wide reform. The City fends off every attempt of effective financial regulation, fearing a decline of importance in international finance.
While the US seen has seen more than 500 mortgage lenders and banks go bust since 2007, Europe's banks push their problems with creative off balance sheet accounting into the future. Except for the UK bank runs could be avoided by now and this leaves only the conclusion that the old continent has yet to face an inevitable future of a major reduction of the bank sector.
The resulting Euro weakness - Greek PM Papandreou threatened a state default on Tuesday - may be a welcome boost for ailing Federal Reserve Notes (FRN) but I would not become too FRN bullish. Altogether the US' problems are much worse than Europe. While both regions face the same problems of unemployment, demographics and an economy FUBAR, Europe is at least not saddled with a handful of undeclared wars: Iraq, Afghanistan and Pakistan.
As I get from Wednesday morning news no solution has been found and I assume we can remain in standby mode until Papandreou meets US President Barack Obama on March 9. But what can we expect from a meeting of 2 leaders of bankrupt nations? There cannot be any real cash on the table.

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