We're Getting Closer

Bruce Krasting's picture

I couldn’t be more delighted than to see the DAX get tagged for 2.5% today. This is a consequence of the “Successful” vote yesterday in the German Parliament to throw more good money after bad. The hit (so far) to German investors comes to $40b. That should make them happy this weekend.

It’s not just investors that a giving the raspberry. According to this WSJ article yesterday, 75% of the folks in German are fed up with more bailouts.

A poll for national German broadcaster ZDF earlier this month shows three-quarters of Germans are against the expanded European rescue fund.

How can this happen? Politicians are doing what the voters don’t want. It can only mean that new politicians are coming and the bailouts will be curtailed.

Keep in mind that the expanded EFSF is still woefully inadequate to address the debt problem in the EU. There has to be a much bigger effort. In my view, anything less than Euro $2 Trillion is not going to work. A big bazooka is required, a popgun is being offered.

This brings us to the speculation this week about a Euro SPV. There was the “Leisman Plan” (I wanna puke) and the EURECA Plan. These are confusing to most people. Let me make it easy. What is being proposed are Euro Bonds in disguise. This is just financial engineering to cosmetically create a joint and several EU debt obligation.

This won’t work. The ratings agencies and investors will see through this. If something silly like this is going to come I would anticipate that Moody’s and S&P will downgrade both France and Germany within weeks. Everything that is being offered is just a half-assed effort to deal with a very big problem.

The conclusion for me is that the Euro has to continue to suffer on the crosses as a result.

I see the dollar as the backbone for the markets in general. In a “perfect” world an orderly depreciation of the dollar (5% a year) is a “good thing”. It supports US inflation (that makes debt look smaller). A weak dollar is beneficial for tourism, and encourages foreigners to buy real assets like real estate. It gives US manufacturers of big-ticket items (planes/construction equipment) a pricing advantage. It also provides a big boost to translated earnings for the S&P multinationals.

The very worst thing that could happen to the US economy in the 4th quarter is that the dollar gains 10% against the Euro. That looks like what is coming to me. Don’t buy the dips, sell the rallies.

 

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BLATANT BREACHES

On the subject of the EU and the banks, an interesting speech by Hans Hoogervorst, Chair of the International Accounting Standards Board (IASB). He spoke at an investors conference in Boston (PDF) yesterday. I wasn’t there. He was quoted as saying:

European banks carried out "blatant breaches" of IFRS in valuing their holdings of Greek debt.

 

Mr. Hoogervorst’s comments were consistent with his letter (PDF) to the European Securities and Markets Authority. Some tidbits from that letter:


There have been indications in the market that some European companies are applying the accounting requirements for fair value measurement and impairment losses in a way that seems to differ from the objective of IAS 39 Financial Instruments: Recognition and Measurement.
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This is evident particularly in their accounting for distressed sovereign debt, including Greek government bonds.
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The bottom line from the chair of the International Standards Board is that the European banks are fudging their books. This is not the Blogs making this assertion. It’s coming from the highest authority that exists.

This conflict can’t be ignored much longer. It’s possible that the EU banks will try to wash this over one more time in their third quarter statements. I think it will be damn near impossible for them to issue annual reports for 2011 without full disclose. In other words, don’t load up on the EU banks just yet…

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