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Archive for the ‘European Union’ Category

Brexit Vote Explained

Posted by Steve Markowitz on June 28, 2016

Last week’s vote by the British people to extricate themselves from the European Union (Brexit) seems to have left many, including the political ruling class on both sides of the Atlantic, in shock.  It is a wonder that a vote that has two possibilities would create any such consternation when it goes one way or the other.

Governments of all sorts of philosophical directions have proven often throughout history an inability to hear the people.  At the same time, they have created an elite ruling class that has benefited substantially from their positions.

Nigel Farage, a British member of the European Parliament, has been a strong proponent for Britain to leave the EU.  During today’s Parliamentary session, Farage made a speech in which he did a victory lap, taunting other members of the European Parliament, posted below.  While his aggressive approach can be questioned, the logic he lays out helps explain the People’s anger building in the EU, as well as other countries.

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Posted in European Union | Tagged: , , , , , , | 2 Comments »

UK Says “Yes” to Brexit

Posted by Steve Markowitz on June 24, 2016

Yesterday the United Kingdom held its referendum as to whether it would stay or exit the European Union.  The vote is in and the British decided to leave the EU.

Today, markets throughout the world have experienced turmoil, seemingly surprised by Brits’ decision.  This reaction is curious given that the various indicators, except the polls, pointed towards a British exit.

The British electorate’s decision to leave the EU is part of a broader worldwide phenomenon.  Governments and bureaucracies in many countries have been growing at increasing rates over the decades.  This has enriched and given additional power to ruling elites.  The masses accepted this until recent years when their standard of living stagnated.  Two changes affected the mentality of the masses:

  • A growing number of middle class in Western Europe and the United States have seen decreasing living standards.
  • Bureaucracies, unelected shadow governments, have exerted more influence through regulations.

Born of dissatisfaction, is a new type of revolution enhanced by social media and the Internet is occurring.  In the United States the phenomena is epitomized by the popularity of Donald Trump and Bernie Sanders.  Their popularity is resounding “no” vote for the status quo, irrespective of the potential consequences of electing untested populists.

Similarly, Britain’s decision to leave the EU is a resounding vote against the status quo.  The British people no longer will allow unelected bureaucrats in Brussels to create laws and regulations for the UK.  They also indicated their desire for stronger border controls.

The European Union was a mismanaged creation of the political class.  The goal was to create a United States of Europe increase economic activity and lessen the likelihood of armed conflicts, as so often happened in Europe.  Unlike the United States with a powerful central bank, European countries still control much of their monetary policies, irrespective of the single currency.  Also unlike the United States where the central government is elected by the people, Europeans have no vote concerning the bureaucracy in Brussels that creates laws and regulations that member states must abide by.  The British say “no more”, irrespective of the consequences of leaving the EU.

Since World War II the world has traveled through two different periods.

  • The Cold War between the United States and the Soviet Union for all practical purposes divided the world into two spheres. This period effectively ended in 1991.
  • Since the end of the Cold War, the political class worked to create a new world order where sovereign borders would be made moot. The beginning of the end of this period started in 2008 with the great financial meltdown.  This meltdown exposed the weakness of this new order that in part was built on flawed policies and excessive debt.

We are in the early stages of the next phase that involves rejection of the political elites’ vision for the world since 1991.  It is likely that the UK’s Brexit vote will be viewed historically as the start of this next phase.  It is difficult to visualize what this new reality actually means, other than significant change.  Progressives overreached in a power grab for themselves and their bureaucracies.  History has shown that this type of action generally leads to overreaction from the other side.

This Blog has repeatedly written of the illogic of the European Union from an economic standpoint.  One posting in October 2013 titled Noble Peace Prize Awarded to European Union reviewed rather incredulously of the European Union being the Nobel Peace Prize.  The turn of events since helps show just how far out of touch the political elites are, including those that award the Nobel Peace Prize.

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European Progressives Never Learn

Posted by Steve Markowitz on February 7, 2016

Thomas Piketty , a renowned economist from France who posted an op-ed in the New York Times titled “A New Deal for Europe”.  While Piketty’s topic is important, his conclusions are misplaced.  His logic shows just how unapologetic Progressives are for the problems their policies have inflicted on the world.

Piketty expresses concern for the growth of the far Right in Europe.  This Blog has been concerned for some time with the potential for fascism to once again rear its head in Europe.  This concern stems from Europe’s unsustainable economic path that has led to the large sections of its population being negatively impacted, creating a breeding ground for discontent.  This path started long before the meltdown of 2008 that Piketty refers to.  Its roots stem from the Left’s Progressive policies that have dominated European politics for decades.

Piketty blames mismanagement by European governments for not only poorly creating the EU, but also managing their economic policies.  While true, the EU’s creation was so poorly done that it guaranteed the current result, as economist Milton Friedman predicted in 1997:

The drive for the Euro has been motivated by politics not economics. The aim has been to link Germany and France so closely as to make a future European war impossible, and to set the stage for a federal United States of Europe. I believe that adoption of the Euro would have the opposite effect. It would exacerbate political tensions by converting divergent shocks that could have been readily accommodated by exchange rate changes into divisive political issues.”

Piketty concludes that Europe’s challenges can best be addressed by governments now doing the “right thing.”  Expecting the same group that created the current mess to do a better job this time is incredulous.

Piketty states: “Only a genuine social and democratic refounding of the eurozone, designed to encourage growth and employment, arrayed around a small core of countries willing to lead by example and develop their own new political institutions, will be sufficient to counter the hateful nationalistic impulses that now threaten all Europe.”  He also says: “The objective would be to reduce public debt as a whole, starting with a system of allocation of payments based on the increases in debt that have occurred since the crisis began.”

Nicely said, but politically and economically unrealistic.  Europe’s political, social and welfare programs make this kind of reform impossible.  Reducing government debt will cause pain to much of society.  Piketty ignores this, much like some of the BS we hear from Republicans in this country who believe that we can grow ourselves out of the excessive debt.

Piketty also concludes: “Such a process demands a new form of democratic governance, one that can assure that such disasters are not allowed to recur.”  Economic realities are disconnected from a “form of democratic governance”.  The laws of supply and demand will prevail in the long run, irrespective of interventions.  While Piketty acknowledges that governmental interventions caused the problems in the first place, he then suggests that further interventions in infrastructure, universities social welfare, etc. are the appropriate response now.  Again, why should we expect these next interventions to work better than the last ones?

Irrespective of one’s belief as to the appropriateness of governmental spending on any particular project; military, green energy, social programs, etc., from a macro economic standpoint the issue is straightforward.  Governments; i.e. the people, can only borrow so much from the future to pay for today’s lifestyles.  We have hit the economic wall with additional borrowing and deficit spending becoming a drag on growth, not simulative, as suggested under Keynesian economic theory.

Excess debt is the basis of our current macro-economic problems.  Central banks worldwide have likely come to this same conclusion, which is why some in Europe and Japan, and likely to come to the United States, are going to negative interest rates.  Given the ineffectiveness of historically low interest rates in the past eight years, central bankers understand that pushing the rates still lower will unlikely to lead to economic growth.  Irrespective of this they are taking this radical step in an attempt to debase fiat currencies, which will lead to a crisis that would enable governments to create a new currency (currencies) that will result in writing off the debt that is unrepayable.  While not a pretty solution, this method for sovereign debt abandonment does not require political will or approval.

The European Union as created will likely not survive.  It has only been held together this long because member countries fear the results of undoing the union.  The Europeans may continue to use Band-Aids to hold off the inevitable, but they do not have the political will or courage to take the steps necessary to make the EU viable. This will have serious consequences.  The blame rests solely on those Progressive politicians who created an entity based on desires, rather than economic and political realities.  Still they have the gall to suggest that the same approach going forward will work better this time.

Posted in economics, European Union | Tagged: , , , , , | Leave a Comment »

Debt, Conflict and the European Dilemma

Posted by Steve Markowitz on January 28, 2015

Europe has is encountering another canary the mine. The Greeks have voted in a radical Leftist party called Syriza. They won as an opposition to the so-called austerity measures placed on Greece since the 2008 economic meltdown that resulted in it not being able to pay its debt.

The 2008 economic calamity was initially caused by a meltdown in the US mortgage markets. Thhis crisis was not by happenstance or caused by normal market forces. It was inflicted on financial markets worldwide as a result of broad-reaching governmental interventions in the economy. This included bailouts of equity markets and industries when the markets attempted to rebalance supply and demand through normal recessionary action. In addition, central banks, particularly the US Federal Reserve, intervened with artificially low interest rates, again in efforts to forestall the normal corrective market actions through recessions.

As a result of the intervention, not only has the recovery been the weakest since the Great Depression, but at the same time the financial imbalances have not been corrected. Instead, they (the debt) have been moved from the private sector to sovereign debt. The most recent economic manifestations that have now become systemic include the significant turmoil in currency markets. However, a potentially more serious issue has surfaced on the geopolitical front, especially in Europe, where the euro and European Union itself is in jeopardy.

George Friedman of Stratfor.com has published an article titled The New Drivers of Europe’s Geopolitics that offers insight into the current building crisis within Europe that is posted in full below. Friedman’s concludes that “I am focusing on fragmentation partly because it is happening before our eyes” referring to the fragmentation of the European Union. In addition, “The coalition of the Radical Left party, known as Syriza, has scored a major victory in Greece.  ….  It is drawing along other left-wing and right-wing parties that are united only in their resistance to the EU’s insistence that austerity is the solution to the ongoing economic crisis that began in 2008.”

Friedman discusses two views within Europe as why the financial crisis of 2008 continues in the EU.

  1. The German version, and the one that became the conventional view in Europe, is that the sovereign debt crisis is the result of irresponsible social policies in Greece, the country with the greatest debt problem. These troublesome policies included early retirement for government workers, excessive unemployment benefits and so on. Politicians had bought votes by squandering resources on social programs the country couldn’t afford, did not rigorously collect taxes and failed to promote hard work and industriousnes
  1. The other version that is beginning to gain traction, especially in the poorer European countries is: “The loans German banks made to countries such as Greece after 2009 were designed to maintain demand for its exports. The Germans knew the debts could not be repaid, but they wanted to kick the can down the road and avoid dealing with the fact that their export addiction could not be maintained.”

Friedman points out that problems caused by government-imposed austerity in countries like Greece have been amplified by governmental intrusion into their economies. For example, many workers in fields such as medicine and other services are state-controlled with these workers being employed by governments. Therefore the austerity programs have more significantly affected the middle class then would have been the case had the private sector controlled a larger part of the economy.

Greece cannot repay its debt. This is not only because they barrowed too much capability under normal conditions, but also because with unemployment rates exceeding 20% in many industries, their economy generates little revenue to maintain critical social services, let alone repay debt.

What started as an economic problem caused by excessive debt is now morphing into social issues that are rocking European stability. This is a major theme Friedman’s article as he concludes:

  • “Europe’s mainstream political parties supported the European Union and its policies, and they were elected and re-elected. There was a general feeling that economic dysfunction would pass. But it is 2015 now, the situation has not gotten better and there are growing movements in many countries that are opposed to continuing with austerity. The sense that Europe is shifting was visible in the European Central Bank’s decision last week to ease austerity by increasing liquidity in the system. In my view, this is too little too late; although quantitative easing might work for a recession, Southern Europe is in a depression.”
  • “Virtually every European country has developed growing movements that oppose the European Union and its policies. Most of these are on the right of the political spectrum. …. The left has the same grievances as the right, save for the racial overtones. But what is important is this: Greece has been seen as the outlier, but it is in fact the leading edge of the European crisis. It was the first to face default, the first to impose austerity, the first to experience the brutal weight that resulted and now it is the first to elect a government that pledges to end austerity.” 
  • The issue then is not the euro. Instead, the first real issue is the effect of structured or unstructured defaults on the European banking system and how the European Central Bank, committed to not making Germany liable for the debts of other countries, will handle that. The second, and more important, issue is now the future of the free-trade zo 
  • “There are then three drivers in Europe now. One is the desire to control borders — nominally to control Islamist terrorists but truthfully to limit the movement of all labor, Muslims included. Second, there is the empowerment of the nation-states in Europe by the European Central Bank, which is making its quantitative easing program run through national banks, which may only buy their own nation’s debt. Third, there is the political base, which is dissolving under Europe’s feet.”

Friedman is concerned about the specter of war once again raising its ugly head in Europe. Most find this a very improbable. However, the history of Europe has been one where peace has not been the norm. Further, during the Clinton administration there was a war in Yugoslavia and today it is occurring in the Ukraine. Add to this history the toxic mix of economic hardship and what is considered unlikely increases in probability.

Today’s instability of Europe, both economic and geopolitical, has its roots in Progressive activism that created unstable borders and economic rules within the continent. This is similar to what the Europeans created in the Middle East after World War I. The resulting mess in the Middle East has led to decades of violence that continues today. Unraveling the mess the Europeans created within its own borders will be just as complex.

The New Drivers of Europe’s Geopolitics is republished with permission of Stratfor.

The New Drivers of Europe’s Geopolitics, By George Friedman

For the past two weeks, I have focused on the growing fragmentation of Europe. Two weeks ago, the murders in Paris prompted me to write about the fault line between Europe and the Islamic world. Last week, I wrote about the nationalism that is rising in individual European countries after the European Central Bank was forced to allow national banks to participate in quantitative easing so European nations wouldn’t be forced to bear the debt of other nations. I am focusing on fragmentation partly because it is happening before our eyes, partly because Stratfor has been forecasting this for a long time and partly because my new book on the fragmentation of Europe — Flashpoints: The Emerging Crisis in Europe — is being released today. Read the rest of this entry »

Posted in economics, European Union, Greece | Tagged: , , , , , , , , | 1 Comment »

Cypriot Bungled Bailout Matters

Posted by Steve Markowitz on March 30, 2013

The European Union’s first bailout attempt of Cyprus was a dismal failure.  That plan included a tax on all bank deposits that was rejected by the Cypriot Parliament.  A more recent deal scraps the tax on depositors, but will still include losses for depositors and bondholders.

Cyprus’s largest bank, Laiki Bank, will be wound down with major bondholders taking losses.  In addition, depositors with over €100,000 will be penalized.  Some of Laiki Bank’s debt will be moved over to the Bank of Cyprus, the country’s largest lender, which will survive after the bailout.  However, many Bank of Cyprus depositors facing losses over 50% of their assets.  Since this will not be a tax it does not require Cypriot parliamentary approval.

Cyprus is a meager part of the European Union’s GDP, less than 1% with less than 1 million residents.  The banking crisis became a much larger problem for Europe for two reasons.  First, Cypriot banks became haven for foreign investors, mainly Russian making its banks eight times larger than the entire economic output of Cyprus.  In addition, as part of the European Union, allowing it to implode risk contagion to other peripheral EU countries.  Finally, it should be noted that the Cypriot banks took huge losses and became insolvent because of its holdings of Greek sovereign bonds, another EU basket-case.

While Cyprus’s is an insignificant piece of the European Union’s economy, the way the crisis has been “resolved” will likely lead to huge consequences for Europe going forward.  Unlike in other EU bailouts, Cypriot depositors were forced to take haircuts on deposits.  This brings into question an issue not raised in Western banks since the Great Depression; the safety of deposits.  If the issue is contained to Cyprus, it will be insignificant.  However, it is only a matter of time before depositors in other weak European countries become concerned about the safety of their bank deposits.  This will lead to a run on those banks.  Prime candidates are Italy and Spain, countries that are indeed “too big to fail”, but at the same time the EU does not have the assets to bail them out.

The bailout of Cyprus is reported to cost the EU less than $10 billion.  Given this relatively small amount as compared to the total European Union GDP, why have they risked so much for the future of the larger EU banking system?  The answer is political.  Germans voters are wary of the bailouts of weaker neighbors and Andrea Merkel’s party faces an election.  This tough approach to Cyprus is designed to mollify German voters.  However, in the long run it places much more at risk for European unity.

Another interesting question is why the fiscally conservative Germany remains part of the European Union with its many weaker and fiscally irresponsible partner countries.  The answer is self-interest.  Germany is much more efficient than its southern partners.  In previous years these countries could have lowered the value of their currency to become competitive against Germany.  With the creation of the Euro, the cost of products from these inefficient countries has risen compared to Germany’s products.  Is not surprising, therefore, that while Spain’s unemployment rate is currently 25%, Germany is a mere 6%.  While the cost of the bailouts for Germany is high, the cost of dissolving the European Union would be even higher.

With the template of the Cypriot bailout in place, the EU has made it policy that under some circumstances it will demand member states seize depositor assets as a price for bailing out its banks.  The message for depositors in European peripheral countries is clear; should banks in your country become financially at risk, your deposits will also become at risk.  Human nature demands action of these depositors.  Depositor funds will move from weaker countries to stronger ones, thereby exasperating the already existing financial strain on weaker European countries’ banks.  This has the makings of Europe’s next banking crisis and it will be the result of self-inflicted wounds.

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Cyprus Bailout Taxes Bank Deposits

Posted by Steve Markowitz on March 17, 2013

Cyprus is a miniscule part of the 17 country European Union accounting for only 0.2% of the EU’s total economic output.  Its total economy is valued at only €18 billion.

Cyprus has become the fourth EU country requiring a bailout after Ireland, Portugal and Greece.  Spain has so far avoided an official bailout, but its banks have been given assistance by the European Central Bank.  Other countries are not far behind including Italy with a much larger economy.

This weekend the European Union announced a bailout of Cyprus that includes an unusual requirement.  In return for €10 billion, CNN reported that all depositor accounts in Cyprus’s banks will be taxed a one-time fee on Tuesday.  Those with less than €100,000 in deposits will pay a tax of 6.75% and those with over €100,000 will pay 9.9%.

Not surprisingly citizens of Cyprus have responded with panic, mobbing ATM machines in attempts to withdraw deposits.  However, the banks placed a limit on withdrawals of only €400 and it is reported that there is a shortage of cash.

After making the announcement, Cyprus’s President Nicos Anastasiades justified the action Sunday saying, “A disorderly bankruptcy would have forced us to leave the euro and forced a devaluation”.  In other words, Anastasiades offered the same Progressive doubletalk that the steps were required to protect the people.  However, this justification will be more difficult to accept given the tax levied on depositors.

The reality of the Cypriot bailout is similar to bailouts that have occurred for banks and sovereign debt throughout the world in recent five years.  These actions were taken to protect the banks and their investors, both private and sovereign investors. These flawed policies have also resulted in economies worldwide jumping from one crisis to crisis in a downward spiral.

Attempting to pay for bailouts by taxing bank depositors is a ratcheting up of wealth redistribution towards the financial sector, protecting large banks and fiat currencies.  While the policies may have some success in the first two goals, this move in Cyprus will increase the pressure on fiat currencies.  It is only a matter of time until fear contagion spreads.  If the Cyprus can take money from bank depositors to pay for the irresponsible behavior of others, it is only a matter of time until other countries take similar steps.

In justifying bailouts and irresponsible government spending, those supporting these actions often refer to the learned economist John Maynard Keynes who was a proponent of government spending to offset slowdowns in the private sector.  However, such rainy day Keynesians ignore the second half of Keynes’ theory that requires governments to save for a rainy day during more vibrant economic times.  This part of the equation has not been met in decades.

Economist Keynes was well aware of the dangers of inflation and the related issue of governments debasing a fiat currency.  Keynes’ written below in a 1919 essay says it all.

By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. By this method they not only confiscate, but they confiscate arbitrarily; and, while the process impoverishes many, it actually enriches some…. Those to whom the system brings windfalls… become “profiteers” who are the object of the hatred…. the process of wealth-getting degenerates into a gamble and a lottery.

Lenin was certainly right.  There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency.  The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose.

Posted in Bailouts, European Union | Tagged: , , , , , , | 2 Comments »

Spain Pilfering its Pension Funds

Posted by Steve Markowitz on January 8, 2013

During the first week of January most of the financial focused on America’s “Fiscal Cliff”.  While an interesting diversion, the world’s economic challenges are much broader than America’s deficits and debt. While Europe’s financial issues are not currently making front-page news, its challenges remain daunting.

Last week the Wall Street Journal reported on Spain’s economic problems in article titled Spain Drains Fund Backing Pensions.  Spain is the “S” of Europe’s so-called PIIGS.  A few examples of Spain’s problems include:

  • The country’s unemployment rate is about 25% with it being much higher for those under 30 years of age.
  • Spain will have to issue over €200 billion in debt for 2013, an increase of approximately €20 billion, over the previous year.
  • In 2012, both Moody’s and Standard & Poor’s lowered Spain’s bond rating to junk status.

Instead of addressing its problems, Spain is compounding them with financial gimmicks.  Its Social Security System had previously created a rainy day fund that would be required in future years as fewer workers will be paying into the fund with more retirees withdrawing from it.  That fund, however, has been robbed by the government who is forcing its Security System to use these funds to purchase Spanish government’s risky bonds.  It is estimated that 90% of the fund is now invested in Spain’s debt.  Not only will these “borrowed” funds ultimately need to be paid back if it’s obligations are to be met, but this pool is now tapped out.  These realities will add to the pressure that will ultimately require Spain to seek a bailout from the European Union.

In addition to Spain’s security system having its fortunes tied to the country’s bad debt, Spain is has also forced its commercial banks to invest their funds in the government’s debt.  This game of having one arm the government, as well as its banks, lend to another arm is a Ponzi scheme that would make Bernard Madoff smile.

If the sovereign financials shell games were limited to Spain or a few countries, the potential problems internationally could be contained.  However, many governments use similar financial tactics, including the United States.  Politicians, particularly those on the Left, either ignore the problem or are delusional with claims that economies can grow their way out of the debt.  Such fantasies are akin to physicists believing in perpetual motion.

Posted in European Union, Sovereign Debt | Tagged: , , , | 1 Comment »

Noble Peace Prize Awarded to European Union

Posted by Steve Markowitz on October 12, 2012

The New York Times reported that this year’s Nobel Peace Prize is being awarded to the European Union.  Upon hearing the announcement, British European Parliament member Martin Callanan said: “The Nobel Committee is a little late for an April Fool’s joke.”  Unfortunately the Nobel Committee is dead serious.

The Nobel Peace Prize award to the European Union is rather incredible given the ongoing riots in some European countries including Greece and Spain over the economic calamity caused to a great extent by the creation of the Union’s single currency.  Incredibly, the Nobel committee acknowledged this with its Thorbjorn Jagland stating: “There is a great danger.  We see already now an increase of extremism and nationalistic attitudes.   There is a real danger that Europe will start disintegrating.  Therefore, we should focus again on the fundamental aims of the organization.”  When asked if the Euro would survive, he then said: “That I don’t know.  What I know is that if the euro fails, then the danger is that many other things will disintegrate as well, like the internal market and free borders.  Then you will get nationalistic policies again.  So it may set in motion a process which most Europeans would dislike.”

Jagland’s statement is an incredible admission that the European Union’s creation is in itself a real danger to peace.  In order to blunt this reasonable conclusion, Jagland blames the United States saying: “There are many things to say about the economic crisis — where it originated, for instance.  It started in the United States, and we had to deal with it.”  This claim is revisionism.  The United States did not create the unsustainable entitlement programs of Europe.  The United States did not force Europe to create a single currency without any concern for economic realities.

European Parliament member Martin Callanan correctly concludes: “The E.U.’s policies have exacerbated the fallout of the financial crisis and led to social unrest that we haven’t seen for a generation.  Presumably, this prize is for the peace and harmony on the streets of Athens and Madrid.

This year’s Noble Peace Prize award is as ludicrous as the one given in 2009 to Barack Obama before any of his policies were implemented.  Just another example of political correctness and Progressives gone wild.

Posted in European Union, Noble Peace Prize | Tagged: , , , , , | 1 Comment »

ECB’s Draghi Feeds the Addicted Markets

Posted by Steve Markowitz on July 26, 2012

CNNMoney reported on today’s comments by European Central Bank (ECB) president Mario Draghi.  Draghi said: “The ECB is ready to do whatever it takes to preserve the euro,” and “the euro is irreversible.”

 

To the markets the implications of Draghi’s comments were clear.  The ECB would take yet another leap intervening in European financial markets.  This will include purchasing bonds from problematic countries including Spain and Italy and increasing its €1 trillion infusion into Europe’s banking system.  Stocks rallied across Europe.

The Dow Jones Industrial Average also reacted favorably, up 200 points in midafternoon trading.  It is remarkable with all of the interventions already attempted to fix Europe’s sovereign debt and banking problems that the equity markets still respond to such hollow promises.  Europe’s liquidity problems have been caused by excess debt that cannot be rectified by adding more debt.  Like drugs to an addict this latest elixir will soon wear off and the world will be back in crisis mode.

In concluding his comments concerning further ECB intervention, Draghi said: “The euro is like a bumblebee – it shouldn’t fly, but it does.  The euro needs to change into a real bee, and it will.”  Mr. Draghi doesn’t seem to understand that many bees do not survive to adulthood.

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Spain’s Finances Deteriorate

Posted by Steve Markowitz on July 23, 2012

The Wall Street Journal today reported on deteriorating financial condition of Spain.  While just a couple of weeks ago Spain was the approved for a bailout, this only offered the country a short reprieve from the bond vigilantes.  Today Spanish bond yields spiked to 7 .5%, significantly above the 6% figure that is problematic for Spain.  As bond yields rise, the cost of governmental borrowing increases.  Given Spain’s huge debt, this is a significant problem.

Worldwide markets reacted negatively to today’s news out of Spain.  Greece’s equity markets were off 7% with Germany’s down 3%.  Other European markets had losses of between 2 and 3%.  It remarkable how the markets are gyrating on a daily basis over the news emanating from Spain and Europe.  The macro-economic problems of Europe are not solvable without significant pain for.  Several countries, including Spain, are insolvent and need to write off their government’s debt before they can hope for growth.  However, instead of moving forward with this reality, European governments continue to kick the can down the road with Band-Aid fixes that have offered ever shortening cycles of benefit.

Economists John Mauldin on July 21 published an article, The Lion in the Grass, that put perspective on Europe’s debt crisis.  In it Mauldin reviews the shell game Europe is using to kick the can down the road.  Previously, Spain was given access to significant funds at interest rates near 0%.  It was then cajoled into loan these funds back the Spanish government by purchasing Spanish bonds at 2 or 3% with the spread making easy profits for the banks.  Supposedly this alchemy included no risk to the Spanish banks.  However, this trickery was foiled by the invisible hand of the bond markets that have since jacked up these rates to over 7%.  Now the government bonds these banks previously purchased have lost principal value with the rising yields placing the banks in even worst financial condition.  This downward spiral is forcing Spain to implement more severe austerity measures, something that is not politically palatable in democracies.  As a result, there is significant capital flight from Spain with investors being concerned for their own capital preservation, as outlined in the chart.

Mauldin then points out a potentially more serious issue in Europe; France’s finances.  The next chart was produced by the IMF (International Monetary Fund) and studies the debt prospects for six European countries.  Five of the countries have three dotted lines indicating the potential directions for their country’s debt.  The chart that jumps out of this group is the one for France.  Even under the best scenario projected by the IMF, France’s debt goes in a direction that is unsustainable.  Should France make the same significant austerity cuts that Greece has been forced into, its debt–two–GDP ratio would still rise to 200% in the next 25 years.

Considering the perilous situation France finds itself rational thought would dictate that the country would take steps for corrective action.  However, just the opposite has occurred.  A little over a month ago France elected Socialist François Hollande and threw out the more economically conservative Nicholas Sarkozy.  Since that election Hollande lowered France’s retirement age from 62 to 60.  In addition, he significantly increased taxes on the wealthy.  It is not hard to imagine that these and similar steps will lead to a capital flight from France similar to what is occurring in Spain.  That has the potential for making an even uglier scenario in Europe.

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