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Posts Tagged ‘Europe’

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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Europe Gives Terrorists Hezbollah a Pass

Posted by Steve Markowitz on March 15, 2013

Since Barack Obama and his Leftist allies are intent on turning the United States into a European clone, it is instructive to review the moral decay that has become Europe.

Europe has often hid behind appeasement to wish away the problems of tyrants and dictators.  The most grotesque example was its attempt to appease Adolf Hitler in the 1930s.  That flawed strategy is directly responsible for the death of tens of millions of Europeans.  Unfortunately, the Leftists in academia have written this reality out of the history books.

Europe continues doubling down on the strategy of appeasement.  A recent example is its handling of the terrorist organization Hezbollah, as discussed in an op-ed by The Boston Globe’s Jeff Jacoby titled Europe’s Hezbollah Cowardice.  Jacoby lists some of Hezbollah responsible killings including:

  • 1983 bombings of the American embassy, US Marine barracks, and a French compound in Beirut, Lebanon killing nearly 400.
  • The hijack of TWA Flight 847.
  • Murdering US servicemen in Saudi Arabia.
  • Bombing a Jewish committee center in Argentina.
  • The bombing of a bus in Bulgaria killing five Israeli and a Bulgarian.
  • Working with the terrorist mullahs in Iran and the tyrant Assad of Syria.
  • Ongoing rocketing of Israeli.

Hezbollah has been so brutal that in 2008 the Secretary of Homeland Security, Michael Chertoff, said: “they make al-Qaeda look like a minor-league team.”

Still, with all of the blood on Hezbollah’s hands Europe refuses to classify them as a terrorist organization.  While Europe’s cowardice is likely a feeble attempt at self-preservation, attempting to limit terrorism on its soil, it would be well to heed the words of Winston Churchill who said of appeasement: “Each one hopes that if he feeds the crocodile enough, the crocodile will eat him last.  All of them hope that the storm will pass before their turn comes to be devoured.”

As Jacoby correctly concludes concerning Europe’s latest bout of appeasement: “The moral stench of that rationalization is almost as repellent as its stupidity.  Yes, Hezbollah’s foremost targets are Jews and the Jewish state – it has always proclaimed the destruction of Israel as its goal – but have Europeans still not figured out that while Nazis and the Nazi-like start by killing Jews, they rarely end with them?”  So, Barack Obama would have us become more like Europe.  It is obvious who that would comfort.

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Two European Countries Debt Downgraded

Posted by Steve Markowitz on November 26, 2012

Two additional European countries have had their credit ratings downgraded recently.  Early in the month Moody’s stripped France of its triple-A rating.  Last week Standard & Poor’s downgraded Hungary’s debt to junk status, double-B.

The downgraded ratings for France and Hungary are not surprising and will likely not disrupt worldwide markets.  These markets have become numb to the ongoing spiral of downward credit ratings for European countries.

The ongoing sovereign debt downgrades will have little impact until they start having impact, which will then be significant.  That reaction will be perpetrated by some player in the debt market running for the exits.  When that occurs, others bondholders will follow the Exodus, which would likely cause a liquidity crunch in bond markets and appreciate their values.  That would increase the cost of borrowing for the affected countries, destabilizing world trade and pressuring those countries’ social programs.

Like any bubble, the bond bubble will likely continue much longer then logic would dictate that it should.  However, anyone holding the affected bonds when the bubble pops will not be able to liquidate them quickly enough before sustaining significant losses.  Then look for a cry for yet another governmental bailout, which at some point in the future will not be available.

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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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European Debt and Government Lies

Posted by Steve Markowitz on July 3, 2012

For a significant portion of the last hundred years a company’s stock value was determined by investors using its price to earnings (PE) ratio.  As the chart shows this ratio remained relatively constant at approximately 10-12, meaning that a company’s stock would sell for about 10-12 times annual earnings, until the 1980s s.  Towards the later 1980s this ratio began a steady rise ultimately peaking at nearly 45 to 1 before the meltdown.

As history judges the main cause of the 2008economic meltdown it will point to various asset bubbles.  This includes the Internet, Datacom and housing bubbles, all fueled by misguided interventionists’ policies of governments.

It is more than coincidental that the rise in the P/E ratio began about 1987, the year of a major stock market crash.  Shortly after the crash, the Federal Reserve panicked and intervened by flooding markets with liquidity.  Similar “corrective” steps followed the various sovereign crisis of the 1990s that occurred in South America, Asia and Russia, as well as when the Internet and Datacom bubbles popped.  These interventions stop the markets from cleansing themselves; i.e. rebalancing supply and demand.  The significant increase in money supply and low interest rate policies brought us to the current crisis now manifesting itself in Europe’s sovereign debt crisis.

The news from of Europe gyrates on nearly a daily basis.  One day it is negative with the next more positive, the result of supposedly interventions by European governments and their central banks.  However, given that European sovereign debt problems continue to grow after all of these interventions tell the real story.

Since the beginning of Europe’s sovereign debt problems these governments and their central banks have not been frank with their public pronouncements.  Their goal is and remains to maintain stability, a goal that would be negatively impacted by honest assessment of the challenges the continent faces.  This reality is explained in detail in an article by Eric Sprott and David Baker titled “Ministry of [Un]Truth that starts by quoting Eurogroup President Jean-Claude Juncker at a Brussels conference a year ago discussing the European financial crisis stating: “When it becomes serious, you have to lie.”  While refreshingly honest, Juncker’s statement indicates the inherent dishonesty in which governments treat the electorate.  This is pure progressivism!

Sprott and Baker offer examples of governments and bankers either misrepresenting economic reality or being oblivious to it, including the following:

  • Former Fed Chairman Greenspan down-played US housing bubble in 2004 and 2005.  How could he have gotten such a huge problem so wrong?
  • Current Fed Chairman Bernanke informing the US Congress in March, 2007 that: “At this juncture… the impact on the broader economy and financial markets of the problems in the subprime markets seems likely to be contained.” By 2007 the scope of this bubble was evident to many.
  • European Central Bank President Mario Draghi assuring the world in March of this year that “The worst is over… the situation is stabilizing.”  On a nearly weekly basis since this is been proven fallacious.
  • Spain’s Prime Minister Mariano Rajoy assuring the world in late May 2012 that: “There will be no rescue of the Spanish banking sector”.  Two weeks later the Spanish government announced a $125 billion bailout.
  • This past April JP Morgan CEO Jamie Dimon called press reports a “tempest in a teapot” concerning the bank’s derivative exposure.  That “tempest” turned out to be a $2 billion trading loss four weeks later.  A larger concern now relates to JP Morgan’s estimated $70 trillion in derivative exposures.
  • After Austria’s finance minister Maria Fekter called into question Italy’s debt she was castigated by the Italian Prime Minister who said: “The problem is that this is market sensitive.  …  It’s one thing if journalists write this but quite another if a eurozone minister says it. Verbal discipline is very important but she doesn’t seem to get that.”  Translation, governments must be dishonest to protect the people.

Sprott and Baker correctly conclude that the interventionists’ policies of Europe have failed and Western economies are once again weakening.  For example the bailout of the Spanish banks was announced on June 10.  Within one week of it Spanish bonds were again trading over 7%.  In addition, reason for the downward spiral is that Spanish banks’ assets include Spanish bonds that are depreciating in greater amounts than the value of the bailouts.

In late 2011 and early 2012 European central banks primed the pump with over €1 trillion being infused.  Much of this cash has been neutralized by more recent European economic turmoil.

As this Blog has proffered by many times an economic problem caused on excess debt cannot be resolved by adding more debt or moving that debt to other locations.  The writing is on the wall.   The excess sovereign debt will ultimately have to be repudiated before real economic growth can begin.  That will be a painful process that the disingenuous governments are attempting to forestall.  However, their sleight-of-hand will only create still more debt that will ultimately make its repudiation even more painful.  Until then, the politicians will continue deceiving the People.

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Spain/Europe Approaching Tipping Point

Posted by Steve Markowitz on June 10, 2012

What started with bubbles, particularly in the real estate markets, morphed into a larger international  banking crisis in 2008.  Interventionist governments including the United States acted quickly in bailing out the banks and other financially dysfunctional corporations and individuals.  These radical steps in essence bailed out reckless borrowers at the expense of more prudent ones were enacted in the name of saving the world from economic Armageddon.  Nearly 4 years later the worldwide economy is once again heading towards the brink.  Clearly these policies have failed.  But that will not stop the governments from throwing more good money after bad.

The inevitable and huge costs of the bailouts were hiding from the People by using printed money to purchase the bad debt.  This did not eliminate the debt, but instead increased and moved to it to various countries’ balance sheets.  These countries then went about selling bonds to cover this massive debt and forcing their commercial banks, especially in Europe, to purchase these toxic assets.  This has played a large role in creating the banking crisis raging in Europe. with Spain currently being at its epicenter.

Yesterday Spain announced it would accept a $125 million European bailout, the fourth and largest European country to require a bailout in the ongoing sovereign debt crisis.  It is unlikely that this bailout will be any more successful than previous European attempts to stop the economic bleeding.  Already the politicians are bracing for more problems.  After announcing the bailout, Spain’s Prime Minister Mariano Rajoy told The Associated Press: “This year is going to be a bad one.”  Given that 25% of the Spanish workforce is already unemployed, this is an ominous statement.

Jens Boysen-Hogrefe, Kiel Institute for the World Economy economist said of the bailout: “It’s a calming signal at a time when calming signals are badly needed.  The uncertainty is still high and bad news can pop up anywhere in the euro area.  This is not a final solution.”  Translation; the can has once again merely been kicked down the road a bit.

This weekend, Nouriel Roubini and Niall Ferguson published an op-ed in the Financial Times that put Europe’s economic crisis into proper perspective.  Roubini, an American economist and professor at New York University’s Stern School of Business, predicted the collapse of the housing market and subsequent massive recession before these events occurred.  Ferguson is a British historian who specializes in financial and economic history with specific expertise in hyperinflation and the bond markets.  These well respected experts stated in their op-ed titled One Minute to Midnight?:

“We fear that the German government’s policy of doing ‘too little too late’ risks a repeat of precisely the crisis of the mid-20th century that European integration was designed to avoid.”

“…….  Fixated on the nonthreat of inflation, today’s Germans appear to attach more importance to 1923 (the year of hyperinflation) than to 1933 (the year democracy died). They would do well to remember how a European banking crisis two years before 1933 contributed directly to the breakdown of democracy not just in their own country but right across the European continent.”

“But now the public is finally losing faith and the silent run may spread to smaller insured deposits.  Indeed, if Greece were to leave the eurozone, a deposit freeze would occur and euro deposits would be converted into new drachmas: so a euro in a Greek bank really is not equivalent to a euro in a German bank.  Greeks have withdrawn more than €700m from their banks in the past month.”

“More worryingly, there was also a surge in withdrawals from some Spanish banks last month.   ….   This kind of process is potentially explosive.”

“Germans must understand that bank recapitalisation, European deposit insurance and debt mutualisation are not optional; they are essential to avoid an irreversible disintegration of Europe’s monetary union.  If they are still not convinced, they must understand that the costs of a eurozone breakup would be astronomically high – for themselves as much as anyone.”

“Ultimately, as Angela Merkel, the German chancellor, herself acknowledged last week, monetary union always implied further integration into a fiscal and political union.  But before Europe gets anywhere near taking this historical step, it must first of all show it has learnt the lessons of the past.  The EU was created to avoid repeating the disasters of the 1930s. I t is time Europe’s leaders – and especially Germany’s – understood how perilously close they are to doing just that.”

Roubini and Ferguson are indicating that the European crisis is a game changer that will require commensurate game changing strategies.  The nickel and dime approach of kicking the can down the road cannot work.  Just as significant, time is running out for such halfhearted approaches.

Many financial experts agree with Roubini’s and Ferguson’s thesis that Europe will require decisive action, and sooner rather than later.  This includes financier George Soros and Nobel Laureate Joseph Stiglitz, among others.

The problem of excessive debt, not only in Europe, but in the United States as well, is the most pressing problem facing the world today.  Governments use of printing presses for problem resolution over the years has made many citizens oblivious to this reality, including some very smart people.  Just last week France’s new President Hollande incredibly lowered the retirement age in his country from 62 to 60 years old.  This will exasperate France’s debt problems.

In the United States debt has been growing at an alarming pace for the past 30 years with it significantly quickening under the tutelage of Barack Obama.  Instead of concern for this serious problem, many Americans focus self-serving economic and social issues.  Unless the Country is on stable financial footing, all Americans will be weaker and have less rights.

Economists John Mauldin said of the financial crisis in Europe that: “Europe has no good choices, only a choice among very distressing and expensive options.”  This same conclusion can be made of all countries with excess debt.  Sovereign debt is an immoral methodology whereby future generations are demanded to pay for the good life of the current generation.  Pulling the plug on this false economic high, like any addiction, is painful.

When a country deleverages, i.e. pays down its debt which ultimately must do, is an unpleasant experience.  Initially, special interest groups attempt to use political leverage to shield themselves from the pain.  This only can continue until a full-blown crisis hits.  That is the status of current Europe and other countries including the United States are not far behind.  Either a country takes corrective action, a difficult task for any democracy, or the cruel and unbending hand of supply and demand will enforce its own corrective actions.

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Pension Crisis in Europe Looms

Posted by Steve Markowitz on June 8, 2012

Europe plays the game of economic “Wach’em”, attacking problems only as they pop-up.  Its current focus is on sovereign debt and banks.  Unfortunately, the problems are broader and systemic.

The Wall Street Journal reported on the looming pension problems that European countries face.  Many of these countries have pension obligations exceeding 200% of their gross domestic product.  Only Sweden, Denmark and Poland have funded their state pension obligations.  The other countries have kicked the can down the road leaving the liabilities to be paid for from future tax revenues, the next generation.  Making matters worse, these pension liabilities are not included in the countries’ public debt figures.  This smoke and mirrors methodology is also used for U.S. governmental pension obligations and even Social Security.

Showing the extent of the problem, in England for example, the current shortfall is over $300 million.  In addition, the Journal reported that in 2010 each European pensioner was supported by four workers, a number that will drop to two within a few decades.  The Ponzi scheme that European governments use to fund their pension obligations is unsustainable.

The chart indicates the size of the public pension problems in Europe.  The worst offender is France whose current liabilities are 362% of GDP.  Remarkably, newly elected French President Francois Hollande’s first act was to lower the retirement age in France from 62 to 60.  For this incredibly stupid act Hollande should join Bernie Madeoff as a cellmate.  Instead, he will be viewed as a hero to many French, at least until the smelly stuff hits the fan in the not too distant future.

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Europe’s Financial Crisis Coming to a Head

Posted by Steve Markowitz on May 26, 2012

It is hard to believe we are now approaching the fourth anniversary of Lehman’s failure.  This bankruptcy started a series of events that led to a worldwide financial meltdown.  Governments worldwide reacted with vigor, bailing out banks and other large firms, setting interest rates at historic lows, and significantly increasing the money supply.  While these actions may have avoided a more precipitous drop in economic activity initially, it is likely that the actions prolong the downturn and has led to potentially more serious economic problems going forward.

The governmental interventions since Lehman’s failure have not addressed the key issue that started the recession, excess debt.  Instead, the interventions took what was bad debt in the private sector and moved it to the governments’ balance sheets at significantly higher levels.  It doesn’t take a PhD in economics to understand that a problem caused by excess debt cannot be resolved by creating still more debt.

For over a year the world has focused on the economic challenges of Europe.  Initially this focus was on Greece and the possibility that it would default on its debt.  In recent weeks it has become apparent that Greece will default on its debt obligations and in fact may leave the European Union.  While these events are significant, it is the possibility of contagion at the larger European economies including Spain and Italy that is starting to become a concern.

Jim Cramer of CNBC’s Mad Money last week predicted a run-on Spanish and Italian banks within weeks, as posted in the video below.  Should this occur, the potential for at least financial anarchy in Europe is significant.  What four years ago began as a problem for the private banks including Lehman, has morphed into the more serious problem of sovereign debt in various European countries.

While governmental interventions of the past four years played a role in creating Europe’s current sovereign debt problems, the incompetent manner in which the European Union was put together by bureaucrats in political leaders played an even more significant part.  While the political arrangements between the European countries has been reasonably successful, the financial union was doomed to failure from the beginning due to its flawed structure.

For those interested in understanding details behind the flawed European financial union, posted below is a piece by David Zervos of Jefferies and Company.  The extent of the incompetence behind the flawed policies that led to the creation of the European Union is staggering and raises some interesting questions.  Who is responsible for this mess and will they be taken to task by the Leftist media in the same way that the bankers were attacked?  Given the extent of governments’ failings that led to the creation of the current economic maladies and the governments’ inability to fix the problem in four years, is it logical to expect these same folks to be any more successful going forward?

The Separation of Bank and State

By David Zervos

“The euro monetary system is flawed. It is a system that was cobbled together for political purposes; and sadly it was set up in such a way that each member state retained significant sovereign powers – most importantly the ability to exit the system and default on debts in times of stress. There is virtually NO federal power in the Union, as witnessed by the complete breakdown of the Maastrict and Lisbon treaties. In fact, what we are seeing today is that the structure of the monetary system is so poorly designed, it actually creates perverse fiscal linkages across member states that incentivize strategic default and exit. Our new leader of the Greek revolt, Mr CHEpras, has figured this one out. And in turn he is holding Angie hostage as we head into June 17th!

[JFM note: CHEpras is David’s tongue-in-cheek name for the 37-year-old leader of the Syriza Party, Alexis Tsipras, whose rhetoric does indeed resemble Che Guevara’s from time to time.]

“To better understand these flaws in the Eurosystem, let’s assume the European monetary system was in place in the US. And then imagine that a US ‘member state’ were to head towards a bankruptcy or a restructuring of its debts – for example, California.

“So let’s suppose California promised its citizens huge pensions, free health care, all-you can-eat baklava at beachside state parks, subsidized education, retirement at age 45, all-you-can-drink ouzo in town squares, and paid 2-week vacations during retirement. And let’s assume the authorities never come after anyone who doesn’t pay property, sales, or income taxes.

“Now it’s probably safe to further assume that the suckers who bought California state and municipal debt in the past (because it had a zero risk weight) would quickly figure out that the state’s finances were unsustainable. In turn, these investors would dump the debt and crash the system.

“So what would happen next in our US member-state financial crisis? Well, the governor of California would head to the US Congress to ask for money – a bailout. Although there is a ‘no-bailout’ clause in the US Constitution, it would be overrun by political forces, as California would be deemed systemically important. The bailout would be granted and future reforms would be exchanged for current cash. The other states would not want to pay unless California reformed its profligate policies. But the prospect of no free baklava and ouzo would then send Californians into the streets, and rioting and looting would ensue.

“Next, the reforms agreed by the Governor fail to pass the state legislature. And as the bailout money slows to a trickle, the fed-up Californians elect a militant left-wing radical, Alexis (aka Alec) Baldwin, to lead them out of the mess!

“When Alexis takes office, US officials in DC get very worried. They cut off all California banks from funding at the Fed. But luckily, the “Central Bank of California” has an Emergency Liquidity Assistance Program. This gives the member-state central bank access to uncollaterized lending from the Fed – and the dollars and the ouzo keep flowing. But the Central Bank of California starts to run a huge deficit with the other US regional central banks in the Fed’s Target2 system. As the crisis deepens, retail depositors begin to question the credit quality of California banks; and everyone starts to worry that the Fed might turn off the ELA for the Central Bank of California.

“Californians worry that their banks will not be able to access dollars, so they start to pull their funds and send them to internet banks based in ‘safe’ shale-gas towns up in North Dakota. Because, in this imaginary world, there is no FDIC insurance and resolution authority (just as in Europe), the California banks can only go to the Central Bank of California for dollars, and it obligingly continues to lend dollars to an insolvent banking system to pay out depositors. In order to reassure depositors, California announces a deposit-guarantee program; but with the state’s credit rating at CCC, the guarantee does nothing to stem the deposit outflow.

“In this nightmare monetary scenario, with the other regional central banks, ELA, and Target2 unable to stop the bleeding – and no FDIC – the prospect of a California default FORCES a nationwide bank default. The banks automatically fall when the state plunges into financial turmoil, because of the built-in financial structure. A bank run is the only way to get to equilibrium in this system.

“There is sadly no separation of member-state financials and bank financials in our imaginary European-like financial system. So what’s the end game? Well, after Californians take all their US dollars out of California banks, Alexis realizes that if the Central Bank of California defaults, along with the state itself and the rest of its banks, the long-suffering citizens can still preserve their dollar wealth and the state can start all over again by issuing new dollars with Mr. Baldwin’s picture on them (or maybe Che’s picture). This California competitive devaluation/default would leave a multi-trillion-dollar hole in the Fed’s balance sheet, and the remaining, more-responsible US states would have to pick up the tab. So Alexis goes back to Washington and threatens to exit unless the dollars and ouzo and baklava keep coming.

“And that’s where we stand with the current fracas in Europe!

“Can anyone in the US imagine ever designing a system so fundamentally flawed? It’s insane! Without some form of FDIC insurance and national banking resolution authority, the European Monetary System will surely tear itself to shreds. In fact, as Target2 imbalances rise, it is clear that Germany is already being placed on the hook for Greek and other peripheral deposits. The system has de facto insurance, and no one in the south is even paying a fee for it. Crazy!

“In the last couple days I have spent a bit of time trying to find any legal construct which would allow the ELA to be turned off for a member country. I can’t. That doesn’t mean it won’t be done (as the Irish were threatened with this 18 months ago), but we are entering the twilight zone of the ECB legal department. Who knows what happens next?

“The reality is that European Monetary System was broken from the start. It just took a crisis to expose the flaws. Because the member nations failed to federalize early on, they created a structure that allows strategic default and exit to tear apart the entire financial system. If the Greek people get their euros out of the system, then there is very little pain of exit. With the banks and government insolvent, repudiating the debt and reintroducing the drachma is a winning strategy! The fact that this is even possible is amazing. The Greeks have nothing to lose if they can keep their deposits in euros and exit!

“Let’s thank our lucky stars that US leaders were smart enough to federalize the banking system, thereby not allowing any individual state to threaten the integrity of our entire financial system. There is good reason for the separation of the banking system and the member states. And Europe will NEVER be a successful union until it converts to a state-independent, federalized bank structure. The good news is that our radical Greek friend Mr CHEpras will probably force a federalised structure very quickly. The bad news (for him) is that he will likely not be part of it! I suspect this Greek bank run will be just the ticket to precipiate a federalized, socialized, stabilized Europe. Then maybe we can get back to the recovery and growth path everyone in the US is so desperately seeking.

“Good luck trading.”

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