France

When you were a child and did something wrong, the worse possible words your mom could say were "wait til your father comes home!" and that dreaded anticipatory angst is what Europeans must be feeling now as the threat of austerity hangs like the sword of Damocles over their heads. The reason we say this is that in fact, as Veronique de Rugy of National Review Online notes, the 'savage' spending cuts in Europe have yet to show up anywhere. All the rhetoric of how Europe's austerity has failed, all the hand-wringing and election-winning, and yet all the major nations are spending more than pre-recession levels; France and the UK did not cut spending at all, and even in Greece and Spain cuts have been small (and any meaningful reforms failed to be implemented). In fact, the epicenter of the current meltdown - Spanish banking - has seen only de-minimus headcount reduction over the past few years - so who is tightening their belts? The trouble, of course, is that while the threat of austerity has struck fear in the hearts of every European voter, the action of raising taxes has hurt just as much and perhaps the "trumpeting the failure of austerity as a reason to go full-Keynesian again" chatter will recede as facts overtake fallacies. As Mark Grant recently noted, there's a big divide between austerity pledged and austerity implemented, as it appears its more about raising taxes than cutting spending.

There are some people who also believe that the private Federal Reserve with the Treasury in tow has the ability to prolong the worst symptoms of the collapse indefinitely, or at least, until they have long since kicked the bucket and don’t have to worry about it anymore (the ‘pay-it forward to our grandkids’ crowd) .  I can say with 100% certainty that most of us will live to see the climax of the breakdown, and that this breakdown is about to enter a more precarious state before the end of this year.  You can only stretch a sun-boiled rubber band so far before it snaps completely, and America’s financial elasticity has long been melted away.  A pummeling hailstorm of news items and international developments have made the first half of 2012 almost impossible to track and analyze.  The frequency at which negative information has surfaced is almost dizzying.  However, a pattern and a recognizable motion are beginning to take shape, and, I believe, a loose timeline is beginning to form. 

While Turkey has assured the U.S. government it will cut purchases of oil from Iran by 20% this year, its total trade with the Islamic Republic increased 47% to $4.8 billion in the first quarter from a year earlier. Sanctions aimed at isolating Iran because of its nuclear program, combined with revolutions in the Middle East, have spurred a tripling in the region’s purchases of Turkish precious metals and jewels to $942 million in the first three months, from $282 million in the same period last year. This 30% increase in demand is contributing to gold remaining above $1,600/oz in what has all the hallmarks of another period of consolidation prior to higher prices. “Turkey is exporting massive quantities of gold to Iran and Arab Spring countries as citizens in those countries switch to portable wealth,” Mert Yildiz, chief economist for Turkey at Renaissance Capital, told Bloomberg on April 30. The increase in trade with Iran comes as sanctions make it harder for trading partners such as Turkey, India and China to pay in dollars and euros. Iran said in February it would accept payment in any local currency or gold. Reuters report today that Iran is accepting payments in yuan for some of the crude oil it supplies to China, the Iranian ambassador to the United Arab Emirates said on Tuesday. "Yes, that is correct," Mohammed Reza Fayyaz told Reuters when asked to comment on an earlier report in The Financial Times.

It may not be a big rise, but the €1 billion increase in Italian bank borrowings from the ECB, from €270 billion to €271 billion in Apirl as just reported by the Bank of Italy, is still a record, and not one Italy should be proud of. The Spanish bank update is pending and will be out in a few days, although if the recent about face by Rajoy, admitting the Spanish banks are about to be nationalized, which today is no longer sending the markets higher, is an indication, it won't be a vast improvement. Sure enough, the fact that the market's attention is once again drawn to an indicator of the PIIGS financial sector insolvency is not good for sovereign spreads and at last check everyone was wider, core and periphery together, as Spain was+5.3 bps, Italy +3.8 bps, Netherlands +0.3 bps, and France 1.8 bps. Even the futures are shocking not green on more bad news.

All this talk of promoting growth rather than austerity misses the point entirely. Who is going to give the Greeks, or the French for that matter, the amounts of money they would need to fill the almighty hole in which they find themselves along with most of the rest of Europe, the UK and dare I say it the US? If your answer involves a central bank don’t pass Go and head straight for jail which is where the banksters and their politico/media fan club should all be anyway.

"In less than two years, we are now up to a total of seven European leaders or ruling parties that have been forced out of office, courtesy of the spreading government debt crisis — tack on France now to Ireland, Portugal, Greece, Italy, Spain and the Netherlands. Even Germany's coalition is looking shaky in the aftermath of the faltering state election results for the CDU's (Christian Democratic Union) Free Democrat coalition partner. This is quite a potent brew — financial insolvency, economic fragility and political instability."

At what price?

While the theatrics of the Greek parliamentary elections are all good and fine, keeping the masses distracted, and will most likely provide an encore performance in just about one month as no government will likely be formed under the current configuration of elected parties, the reality is that unless something drastically changes for the better in the Greek economy, the political situation will only get more and more chaotic until finally the country succumbs to outright anarchy, and possibly far worse. Unfortunately, as history has shown us, economic depressions usually become toxic death spirals where absent major external shocks, there is no hope of recovery. Sure enough, the latest news of Greece confirms just that. As Ekathimerini reports, the real news is that while superficially change may be coming to Greece, beneath the surface absolutely nothing is improving and in fact things are getting worse as measured by two key indicators: i) vacant Athens office space, which has soared to 20% in Q1 2012 compared to 15.5% a year earlier, which means far less corporate tax revenues and business spending, and ii) the lifeblood of the Greek economy - foreign tourism - is drying up, plunging by 12.5%, as foreigners suddenly have better things to do than go to countries better known for the Syntagma Square riot cam than the beaches of Santorini. Not surprisingly, the biggest source of foreign tourists, Germany, has seen its share dry to a trickle from 15% to just 3% - one can't imagine why those called Nazis by the neo-Nazis would have reservations about spending 2 weeks in the former tourist haven. The result: far less tax revenues, far greater reliance on debt as source of cash, and an economic collapse in 2012 that will put 2011 to shame. So much for the IMF estimate of an unchanged GDP print in 2013 on which the entire second Greek bailout package was based...

In France, no one can hear you scream.

In France, Hollande has the rep of having no backbone like a jelly fish (or flan). We will see what he really stands for and what he can achieve. Moreover when he tries to govern we’ll see if this election was more about picking him or dumping Sarkozy. I suspect it was more the latter... Greece is just a mess and I don’t know what model you apply to understand it. It may take a number of election iterations before the ‘people’ figure out they have a bitter pill to swallow and pick someone to figure out what it will look like.

Just like Rome wasn’t built in a day, the Eurozone won’t be destroyed in a day, but it is on a path that leads to eventual dismantling. This week we will see everyone play nice. Conciliatory words will be spoken.  Growth will become the topic de jour.  The markets will fall all over themselves once again on news of bank bailouts.  The headlines we get in the early part of this week will once again be overwhelmingly designed to encourage people and the markets.  Europe will have a new spirit of co-operation and will welcome fresh insights into the process.  Growth, growth pacts, plans to grow, infrastructure growth, etc., will be talked about.  There will be talk, and maybe even action on the bank recapitalization efforts.  Good banks and bad banks will abound.  Governments will promise money to banks at rates so low no sane investor would even consider. Ultimately these plans will fail, and we will see fresh lows on the year for stocks, with the U.S. and Germany hit hardest as justifying further bailouts for the core will be nigh on impossible, growth is not easy to achieve, and the good-bank-bad-bank model is a loser from the start.

Now that France has a Socialist President the story is not over, not even close to over as the next French elections, for Parliament, will roust the nation once more into the spotlight as Ms. Le Pen and her allies assume a new role, a higher ground, and as the financial situation in France deteriorates they may get an even bigger slice of the pie than thought at present. It is not just that Europe is going to be governed in a different fashion but that France will be run differently and with more difficulties I predict than currently thought. The recession and the anger directed at Germany are rousing the spirits once thought dead; France for the French, the Netherlands for the Dutch, Greece for the Greeks and soon we may find the same dreaded tale in Germany as Nationalism rings in the death knell for European unity and for the political parties that flaunted it. It is a rolling thunder all across Europe, that much is known, and the implications of it all will be felt by the people of each separate country. The dream is fading into the reality of a different sun and daylight will mask that which was dared to be dreamed years before.

After plunging by 19 points in the overnight session, and just touching the 100 DMA, ES has managed to score a recovery, one which has so far clutched at straws, namely stronger than expected German factory orders (+2.2% vs Exp. 0.5%) despite German GDP due in a week which may well push the core European country into the same double dip tsunami which has swept the resto of Europe, if it prints even a slightly negative GDP print. News from Spain that the "bad bank" bailout has started, with Bankia as the first casualty is also lifting spirits as it means that more taxpayer cash will be used to support risk assets. How long this micro euphoria of "bad news is good news" lasts is anyone's guess, but mostly that of the BIS which after failing to defend the 1.3000 EURUSD, has again managed to get the all important pair over the critical support area. 

European cash equities opened sharply lower this morning following electoral uncertainties arising from various corners of Europe, notably Greece and France. Volumes also remain light as the market closure across the UK reduces the number of participants today. The mainstream political parties from Greece, PASOK and the New Democracy, failed to establish a majority this weekend as voters firmly expressed their discontent with the political establishment, evident in the rise of fringe parties. As such, the leaders of New Democracy and PASOK will now attempt to establish a coalition party with the splinter group Independent Greeks (a party notable for its anti-EU/IMF stance), due to begin as soon as today. The uncertainty in Greece’s future has taken its toll across the markets today, with EUR/USD beginning the session sub-1.3000 and all European equities trading markedly lower throughout most of the morning session. Elsewhere on the political front, Francois Hollande has won the French Presidency and is to be inaugurated on May 15th, as such; participants now look out for any comments regarding the relationship between the new French leader and German Chancellor Merkel. The Spanish government are set to make an announcement on Friday concerning the continuing troubles over the Spanish banking sector, with a government source commenting that the plans will include the creation of a 10- and 15-year ‘bad bank’. Recent trade has seen a recovery across forex and stocks as EUR/USD grinds higher and stock futures move closer to unchanged. Strong German factory orders data has helped the moves off the lowest levels, as demand from outside the Eurozone helps lift the figure above expectations of +0.5% to +2.2% for March.

By the look of things, French youth are celebrating Hollande’s victory by picking up all of their friends and then driving up and down the streets honking their horns incessantly. Most cars were packed to the brim with passengers hanging out of every window and even the sunroof waving French flags, singing, or simply yelling pro-Hollande slogans.