Via Mark J. Grant, author of Out of the Box,
There are a variety of ways of making a point. I am not in the Armageddon crowd or the ranting and raving group. I find it to be irresponsible to call for the end of the world and personal aggrandizement is not what I am after in my commentary. What I write here has one distinct intention and that is to keep you out of trouble. After my very long tenure on Wall Street I know how the Great Game works; make money in eighths and quarters and loose it in points and scores of points. Grant’s Rules 1-10, “Preservation of Capital” is always uppermost in my mind and as Europe sinks into a great and wide gaping hole and as even the IMF projects a deepening recession the concerns that I have felt, the concerns that I have warned about so repeatedly are increasing right in step with the inabilities of Europe first to recognize and then to constructively deal with their problems.
There is a song that is reminiscent of Europe and I listen to it many mornings. The tune is “Oh No” by Mike and the Mechanics. I provide the link here to share it with you but make sure you are somewhere where your colleagues will not come running into your cubicle or office all wide eyed before you click on the link. I hope you enjoy my rather novel manner of making a point this morning.
As I listened to the Finance Minister of Germany yesterday saying that Spain does not need a bailout it was quite obvious to me that either the fellow was wandering around in the Rhineland with some very rose colored glasses or that he had become trapped in what I have long feared; that Europe has come to believe their own made-up facts. I have argued, for the past two years, that there are very real consequences to distorting reality. I have pointed out the real debt to GDP ratios for Spain, for Germany, for Greece and a number of other countries. Time and time again I have said that all I did was to add up all of the liabilities of a nation and then divide it by the official GDP that is handed to us. The Press has made some mention of my figures but they have mostly been ignored as I am not the official giver of data. Many have felt that both methodologies were of some value and that it was perfectly fine that the nations in Europe and that the European Union provided figures in their own manner. I am sorry to tell you that this is not the case and was never the case because the non-inclusion of state guaranteed debt, government backed bank bonds, nationally guaranteed regional debt, derivative contracts signed by the nation and corporate debt and securitizations guaranteed by a country and pledged at the ECB may eventually turn from contingent liabilities and into real liabilities that must be paid. What is not counted does not vanish into thin air because it is not counted. I have whacked everyone about the head with this for two years and many of you went on and swallowed the medicine handed out by the EU and went on your merry way. This will prove to be a major mistake!
“There are decades where nothing happens; and there are weeks where decades happen.”
You see, Europe is in a recession and it is getting worse and it will affect America, make no mistake here, and our earnings season in this quarter and in the next quarter is not going to be pretty. Having made note of that; this is not the point of today’s commentary. Recession drives contingent liabilities into present liabilities quickly and with force and the cattle are now out of control and the stampede has begun. For those of you perhaps wishing for and certainly waiting for some type of “Lehman Moment” to flee; you may find it soon. The danger has always been that Europe will believe its own stuff and then make judgments based upon it and if this turns out to be the case then the decisions will be wrong and the consequences horrific.
The firewall concept failed as exemplified by Spain and so what do we find but the new European answer; to build another firewall entitled the ESM. We are given the size of this new contrivance and we are told that it will protect the Continent like some dyke protected the Dutch in that age old children’s tale. Yet, like so many grand schemes handed out by Europe; the plan is NOT funded, the money is NOT there and part of the funding is supposed to come from Greece, Ireland, Portugal and Spain who are the very countries that are in deep trouble and cannot even fund themselves. The paid-in capital of the ESM, when fully funded, will only be 80 billion Euros ($103.6 billion) and the money is to be paid in five tranches over the next two years and so the giant firewall is actually a “promise of a firewall” and any actual funding must go back to every individual nation that may or may not decide to commit new capital. The scheme has been approved by everyone but not the money to fund it. Europe may not like and may not count “contingent liabilities” but they certainly love and always count “contingent assets.”
Quietly, ever so quietly, I am informing you this morning we are staring at a ticking time bomb and the hour is late. There has been no decision made about Cyprus, no decision made about Greece and no decision made about Spain while both the hours and the money fritter away in each of these three countries. The quite real possibility of social unrest are mounting and the peaceful demonstrations, so often ignored by many, may erupt as people lose their houses, their incomes and watch their grandparents live in disgrace as a result of “pension adjustments.” You can “hail and congratulate” all that you like but when a father in Spain guaranteed a loan for his daughter to get an apartment and she can no longer afford to pay the mortgage because she is out of a job and when the father cannot make the mortgage payment either and loses not just her apartment but his own house as part of the “hail and congratulate” austerity measures then you are asking for trouble and trouble on a national if not European scale.
In Greece, in Spain, in Portugal the combination of austerity measures, higher taxes and reduced pensions and social services, are subjecting more and more people to a level of poverty that has not been experienced in a generation. While we often discuss politics and social consequences at the lofty levels of academic inquiry I remind you that there are people in the streets and living on the sidewalks now all across Southern Europe.
“Poverty is the parent of revolution and crime.”