FedUpUSA

Archive for the ‘Eurozone’ Category

This pretty much sums up what Hollande’s victory in France today will mean for Europe’s economic outlook.

At The Milken Institute conference yesterday, Hugh Hendry delivered his usual eloquent and critical insights on the state of Europe. Beginning with the statement that “All of Europe has defaulted”, the canny-wee-fella(translation: shrewd and cautious young chap)explained that “The political economy in Europe is such that the politicians chose to default on their spending obligations to their citizens in order to honor the pact with their financial creditors and so as time goes on, the politicians are being rejected.” Between France’s election of Mr. Hollande and Luxembourg’s ‘when times get tough you have to lie’ Juncker, Hendry says the only inspiration for Europe is fiction as “you just can’t make up how bad it is” as he goes on to discuss the precedent for a way forward, the grotesque distortions of fixed exchange rate regimes, why Weimar happened, why the transfer union will never happen, Ayn Rand’s reality, and fear politicians are feeling.

The entire discussion is well worth watching for a sense of the underlying reality in Europe.

The underlying reality that what the European monetary union is about is not about preventing a third so-called European civil war, it is essentially about making someone (France, Germany or both) a Great Power, a European Hegemon, and a global player.

Starting at around 12:00, Hugh begins his must-watch discussion…

And begins again at around 30:00, Hendry discusses the British perspective on the impeccable logic of the German mind and why the transfer union will never happen in Europe…and why Wiemar happened…

At around 46:00, Hendry addresses Germany’s emerging housing bubble (and why it won’t occur) and the two forms of leverage in the world.

From 52:40, Hendry takes on the view of (disagreeing with) a weak USD and the US being supplanted as a global leader

Hendry confesses to not being able to finish reading Ayn Rand’s Atlas Shrugged at around 1:02:00 and explains why (apart from its length and lack of pictures)…noting that is too depressingly real in its description of the world we live in today…

 We have reached a profound point in economic history where the truth is unpalatable to the political class – and that truth is that the scale and magnitude of the problem is larger than their ability to respond – and it terrifies them.

Concluding at 1:10:10 - “we are single-digit years away from the most profound market clearing moment”

Zero Hedge

…. all over.

Spain’s sickly economy faces a “crisis of huge proportions”, a minister said on Friday, as unemployment hit its highest level in almost two decades and Standard and Poor’s downgraded the government’s debt by two notches.

Spain has tried to do what we tried to do, what Greece tried to do, what the rest of the EU tried to do — continually borrow and spend money to prop up a monster lending bubble.

This strategy failed because it mathematically must fail.  It is impossible for it to succeed over the intermediate and longer term, irrespective of what politicians would like or what they promise the people.

De Guindos also said Spain would increase the value-added tax and other indirect taxes next year, but would seek to reduce payroll taxes. Spain has a low VAT compared with other European countries even after raising it in 2010.

Which will cause GDP to contract further, since that which you tax must come out of either “C” (consumption) or “I” (investment.)

But — simply cutting spending doesn’t avoid this outcome.  That reduces “G”, which in turn reduces GDP.

The problem we continually have in this country and in Europe is that we keep doing the same things that led us down the hole, attempting to protect the banksters who made loans that cannot be covered.  Spain remains unwilling to actually force those who made the bad loans to eat their own cooking, even if it chokes them:

Spain’s government and its banks are discussing a new scheme to segregate problematic property loans into one or more asset management companies to relieve the burden on struggling lenders, according to officials and bankers.

That relieves nothing.  It is either a scam (that is, it transfers nothing) or it takes the bad debts of private entities and transfers them to the taxpayer, thereby turning them into permanent impairments in the economy that then must be financed and covered from tax revenues.

The latter is an open, public and outrageous act of fraud and sedition that deserves prosecution, imprisonment and were we to still have the original Coinage Act, capital punishment.

The simple fact of the matter is that there is no resolution to these problems until and unless budgets are reconciled with current taxes.  That’s the beginning and end of it; that which we demand government provide in services, whether here or elsewhere, must be paid for with current tax revenues.

I know this is politically unpalatable but it simply doesn’t matter — addition hasn’t changed its fundamental character ever in history, and neither has subtraction.

The sooner we stop lying to ourselves and governments stop lying to the people the better off we will all be.

This is going to get interesting rather quickly…

Germany’s Bundesbank is the first of the 17 euro-area central banks to refuse to accept as collateral bank bonds guaranteed by member states receiving aid from the European Union and the International Monetary Fund,Frankfurter Allgemeine Zeitung reported.

The Bundesbank won’t lend to banks against bank debt guaranteed by Greece, Ireland and Portugal from May, the newspaper said, citing unidentified officials. The Frankfurt-based central bank currently has less than 500 million euros ($667 million) of those bonds on its balance sheet, FAZ reported.

That ought to the end of the “fungibility” argument for Euro-area debt.

Or how about a new “household tax” being assessed in Ireland?  Wait…. a tax for being alive?  That sounds like Obama!  Unfortunately the Irish appear to have lost their balls — and their rifles from the IRA years.  They need to find at least one of the two, and soon — and hopefully the non-violent forms of recourse will be employed.  After being sold out repeatedly by the jackals of finance, one wonders if Irish whiskey has addled their brains to the point of inability to properly respond to being financially raped.

Oh, I forgot to tell you that the flat tax is being replaced next year by a progressive (funny, that word) tax that will assess some people with as much as 10 times the current liability (oops!)

Ireland is no stranger to corruption.  Remember Unicredit?  Maybe you can all explain to me why the Irish people should pay for the profligacy and intentional bad lending decisions made by Irish banks?  After all, they didn’t get a seat at the table in the lender’s committee when making the decision to loan (or not), so why should they bear the cost?

That’s the key question, you see.  The ability to shift responsibility after the fact for bad decisions while pocketing the money for good ones (and even for bad ones!) is commonly known as slavery or despotism.  It is the sort of thing that has, in the past, led to revolution, especially when enabled and combined with official corruption.

More importantly, however, you can’t obtain actual prosperity until these games and schemes stop and the bad loans are forced into the open and defaulted.  Covering them up with even more schemes and scams doesn’t solve anything — it just makes for a bigger, more-convoluted mess.

If you think we’ve found an answer to any of the problems we began to stare down in 2007 and 2008 you need your thorazine dose adjusted — upward.

And no, this isn’t an April Fools’ joke.

First off, the details of the swap are as follows: the ECB simply exchanged 50€ billion worth of old Greek sovereign bonds (which were soon to be worth much less if not be outright worthless) for 50€ billion worth of new Greek sovereign bonds which would not be exposed to default risk or any kind of debt restructuring (unlike those bonds held by private Greek bond holders).

I want to mention here that the ECB only owned about 50€ billion worth of Greek sovereign bonds to begin with. So they exchanged roughly ALL of their exposure to Greece to new bonds that will not lose money during a restructuring or default.

The message here is clear: all private investor sovereign bond holdings are now subordinate to those of the Central Banks/ the IMF.

The ECB had been toying with this idea of subordinating private debt holders for over a year now: all negotiations concerning a Greek debt restructuring featured private debt holdings taking a “haircut” while the ECB, IMF, and Eurozone countries kept their holdings at 100 cents on the Dollar.

However, this latest move by the ECB has made this arrangement completely formal. Essentially, the ECB just told the private bond market “what we own and what you own are two different things, and ours are the only holdings that are risk free because we make the rules.”

Thus, the academics, who have been governing the private economy and private capital markets for the last four years, have finally made their control of these entities explicit. It’s simply astounding. And the repercussions will be severe.

However, for now, the mainstream media believes this move to be insignificant:

Feared Bond Swap Met With Shrug (from the Wall Street Journal)

A bond swap completed last week aimed at protecting the European Central Bank from a restructuring of Greek government debt was widely seen as unsettling euro-zone sovereign-bond markets. So far, though, it hasn’t.

Last week, the ECB swapped the estimated €45 billion to €50 billion ($59.2 billion to $65.7 billion) face value of bonds—bought in the open market in 2010 and 2011 in a vain effort to quell bond-market turmoil—for bonds of the same face value. The new bonds—unlike the old—won’t be subject to any forced restructuring like those held by private bondholders.

The above story only confirms that that mainstream media, like the Central Banks themselves, have no concept of the unintended consequences such policies can create: if you’ll recall most coverage of the Fed’s QE 2 announcement only briefly mentioned that some “critics” thought the move might result in runaway inflation. What actually happened were numerous revolutions, riots, and a massive increase in the cost of living as inflation took food prices to record highs.

With that in mind, it is not surprising that the media has not caught on to the true consequences of the ECB’s move. However, the ripple effect this will have on the private bond market is going to be seismic in nature.

The global sovereign bond market is roughly $40 trillion in size. And the ECB just sent a message to all bond fund managers and private financial institutions that their Euro-zone sovereign bond holdings are not only the only holdings that are “at risk” for debt restructuring, but that ECB can change the rules at any point it likes.

This instantly and immediately makes Euro-zone bonds far less attractive to private investors. It was bad enough that the idea of a 50+% haircut on a sovereign bond was on the table. The only reason private Greek bondholders were willing to stomach this was in order to avoid a default/ catastrophe and the total loss of capital.

However, now all private bond investors know that not only will they be shouldering all of the losses during any upcoming sovereign defaults/ debt restructurings but that the ECB can change the rules any time it likes.

Indeed, the only reason the ECB was able to get away with this without causing private bondholders to flee European sovereign debt en masse was because it didn’t take a profit on the debt swap.

In terms of Europe’s ongoing debt Crisis, this move is extremely damaging to any hopes of clean debt restructuring for Greece or the other PIIGS countries (Portugal, Ireland, Italy, and Spain). Remember, this entire round of the Euro Crisis was caused by concerns over 14€ billion in Greek debt payments that were due March 20^th.

So what happens once we get into the hundreds of billions of Euros’ worth of sovereign debt that needs to be rolled over in the coming months. The ECB, IMF, and EU have already spent 176€ billion trying to prop up the PIIGS bond markets. What happens now that private bondholders know that any potential restructuring of sovereign bonds for these countries means them taking a large hit while the ECB doesn’t suffer a cent in losses?

Again, we really need to step back and think about what just happened: the entire Eurozone and financial system were on the verge of collapse because of a mere 14€ billion in debt payments from minor country. This should give us pause when we consider the fragility of the financial system.

Regarding the actual Greek deal itself, it:

1) Fails to address Greece’s debt issues (the new forecast is that Greece will cut its Debt to GDP ratio to 120% by 2020)

2) Slams Greece with additional 3.3€ billion in austerity measures (spending cuts and tax increases) thereby guaranteeing a weaker Greek economy (Greece is already in its fifth year of economic contraction)

3) Is anything but guaranteed (Germany and the Netherlands have raised issues that could stop the deal dead in its tracks)

We’re fast approaching the end of the line here. It’s clear that the EU is out of ideas and is fast approaching the dreaded messy default they’ve been putting off for two years now.

Indeed, Greece is just the trial run for what’s coming towards Italy and Spain in short order. NO ONE can bail out those countries. And they must already be asking themselves if it’s worth even bothering with the whole economically crushing austerity measures/ begging for bailouts option.

Which means… sooner or later, Europe is going to have to “take the hit.” When it does, we’re talking about numerous sovereign defaults, hundreds of banks going under, and more. It will be worse than 2008. Guaranteed.

This is not a situation that gives one much confidence that Germany will stick around for too much longer. It is my view Germany is going to do all it can to force Greece out of the Euro before March 20^th (the date that the next round of Greek debt is due) or will simply pull out of the Euro (but not the EU) itself.

Indeed, I recently told subscribers of my Private Wealth Advisory of a “smoking gun” that proves Germany is ready to walk out of the Euro at any point. I guarantee you 99% of investors don’t have a clue about this as the mainstream media has completely ignored this development.

Graham Summers – Phoenix Capital Research – Gains, Pains & Capital

Graham’s note: this is an excerpt of a client letter I sent out to subscribers of Private Wealth Advisory regarding the ECB’s “game changing” Greek debt swap. To learn more about Private Wealth Advisory and how it can help you grow your portfolio (we returned 9% last year vs 0% for the S&P 500) CLICK HERE.