"Not Counted" Does Not Mean "Not There"

Tyler Durden's picture

Via Mark J. Grant, author of Out of the Box,

“Our inventions are wont to be pretty toys, which distract our attention from serious things. They are but improved means to an unimproved end. We are in great haste to construct a magnetic telegraph from Maine to Texas; but Maine and Texas, it may be, have nothing important to communicate.”
 
                                -Thoreau
 
I suppose one could reach this conclusion living in solitary bliss in the middle of the woods but the supposition or perhaps conclusion does not seem to be the way of things in the real world. There is always something to communicate, always a novel tale to be told and, these days, with the advent of virtually instant communication it is not the “shot heard ‘round the world” but the word or photo that may prompt action with mere seconds from its transmission to its reception. We are now living in an instantaneous world where action and then reaction is divided by the nanoseconds once only spoken of by physicists and the mathematically inclined.
 
Riots in Madrid or Athens are on our screens with an immediacy that could hardly be imagined just a scant ten years ago and the change to the way we make investments decisions and the skills and adroitness now necessary to keep your portfolios in-line with a world that has gone “live” is a new dynamic for those of us that have been on the Street for some years. When I began on Wall Street the ticker tape was still in existence, just barely but it was still there, and the gentleman of Wall Street began their day with the Wall Street Journal so that we could find out what happened overnight in America and the rest of the world. These are days gone, long gone, and different strategies must be employed as a result.
 
I write specifically this morning to those of you that presently occupy positions that I used occupy myself. You cannot be in a meeting and out of touch, out of contact any longer. You must devise some system that in the case of emergency that you can be found and the likelihood of events that could cause you to scramble is increased by two factors; the immediacy of news and the necessity of reacting to it. Real social unrest in Spain or Greece or the bombing of Iran or some black swan even that could massively move the markets are outliers no longer. You may not appreciate being disturbed in Board meetings or woken up in the middle of the night but if you are a senior decision maker you cannot afford to be tucked away in your solace any longer. The world is not just connected but now moves at a speed that could hardly be imagined when I arrived on Wall Street almost four decades ago and, like it or not, the winning of the Great Game now demands either being plugged-in or shut-out.
 
A Recent Announcement
 
Do not disregard or minimize the recent announcement by Germany, Finland and the Netherlands that was joined twenty-four hours later by Austria. The funding nations in Europe placed a line in the concrete when they rejected assisting legacy issues and loans. This group of nations vacated, in this one statement, all of the pleas and demands of the periphery countries that had lined up for aid and ever-more aid relying upon the pledges of the solidarity of Europe and they got an answer, a very Germanic answer which is not, I am quite sure, what they wanted to hear. The joint response was a “Nein” that threw the responsibility and the monetary contribution back to the individual sovereign nation so that it is just not “austerity” that will be demanded but the drain of the capital of a singular nation that lines up for help. It was quite clear, “your money first and then ours” which will increase and magnify the divide between the have and have-not countries on the Continent.

The announcement also nullifies, in part, the “save the world” tactic of Mario Draghi. The ECB will not move without EU approval he has said in setting the “condition” of any ECB action and it is now quite transparent that Germany and the rest will not be approving any ESM transferences until the nation asking for money has been bled dry and that Greece, Portugal, Ireland and perhaps Spain with their line of credit for their banks may not receive anything at all in the way of new loans. In the case of Spain, if the wall is hit, it will take all of the money in the current ESM to fund the country and any money for Italy, if it came to that, would have to come from an additional round of financing that I doubt is now politically possible in Europe.
 
The Rational Basis of my Skepticism
 
The ECB, as I quoted recently from their own published balance sheet, has $15 trillion in loans outstanding to Europe. They claim a $4 trillion balance sheet based upon not counting guaranteed loans by various nations and by not counting contingent liabilities. This is the same scheme that is used for calculating the debt to GDP ratios of the countries in Europe. The methodology is consistent. If a loan, a debt, is guaranteed by a nation or if the liability is “contingent;” it is not counted. This, of course, does not mean that possibility of having to fund or write-off something is not there; it just means it is not counted.

Furthermore all guaranteed loans or debts of any nation, including Greece, are deemed “risk-free” and so the balance sheet of not just the ECB but the banks in Europe are skewed, as in incorrect by American standards, by the methodology employed. What is the “Standard Operating Procedure” in Europe would be fraudulent in the United States and while you may think that everyone is entitled to their own manner of doing things it also must be said that the European invention allows for increased risks and leverage that could overcome the Continent at any point. “Not counted” does NOT mean “not there” and so the cause for my great concern.
 
European banks were supposed to be de-leveraging  in accordance with the Basel III rules but have grown by 7% according to recent data released by Eurostat. Target2 was supposed to be shrinking but has grown to almost one trillion Dollars. The loans at the ECB have been increasing and whether the credit line to the Spanish banks or the loans to the banks of many countries in Europe to buy their debt at auction keeps on growing. The risk factor is magnified so far past any margin of safety that I am fearful, more than fearful, that some event, some relatively minor event in fact could throw Europe off a cliff that will make our fiscal cliff look like a gently rolling hill in comparison.
 
I repeat and repeat again:

"NOT COUNTED" DOES NOT MEAN "NOT THERE!"