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Confusion Reigns In Europe

Tyler Durden's picture




 

Via Blain's Morning Porridge,

Great story on Bloomberg this morning arguing Rajoy is waiting for conditions to get worse so he can garner easier terms for a Spanish Bailout. I get that, but the FT suggests a compromise whereby he can take a rescue with honor intact has been found.

Oh so many things I simply don’t understand creating confusion. Like why the European Union won the Nobel peace prize? Please! Or how the Euro Elites are apparently going to fudge a third Greek bailout (plus Cyprus and Spain) into a single ask when the Germans are apparently still saying no to anything (publically)? Although the EU says it’s in a “final stage of negotiation” on an Greek extension, well placed sources in Greece say a haircut of all debt to 20% has already been agreed in principal – hm.. that’ll impress Angela.

So, lots of stuff for the European leadership to contemplate as they head to Brussels for their latest Gabfest Thursday/Friday. What’s the betting on a late night Friday? Don’t worry about Europe - I’m sure they will reach a series of acceptable fudges.

I’m far more intrigued as to what markets will make of last week’s IMF admission austerity doesn’t work, and what scenarios may result. I suspect the world may be moving forward faster than we think – and as always, it’s all about politics! Although it didn’t take Sherlock Holmes to figure government spending multipliers are far larger than previously believed  - will admitting it trigger a whole new wave of angst across Europe? Don't bet against it! If austerity doesn’t work, will something replace it? If so what? And what are the likely effects on bond and stock markets?

For economies tied to government patronage in a global recession, austerity was unlikely to work. But, because of the moral hazard / electoral trade off at the core of Europe, austerity was the only politically acceptable treatment the EU could prescribe. Countries that spent themselves into crisis have to be seen to be suffering while "unspending" themselves out! As the crisis has deepened, that simple dynamic has become increasingly complex.

Even though the IMF now admits austerity may be deepening the economic woes of struggling states, it's not a given Germany et al will agree to anything else - especially as Election year looms. For the Eu/IMF/ECB troika to step back and agree alternative economic treatments is going to remain long-term and potentially troublesome in terms of Northern European approval. So - don't expect anything sudden to replace austerity – it remains the only option today, but the debate has begun.

This is where it gets interesting. Enforced austerity is a lid on the pressure cooker, and some point it has to come off. For instance, have you noticed how the stressed Eurozone countries in the olive oil belt have become increasingly aligned - anti-austerity could further unite them. The political trick for southern Europe is about how far they can push Germany and the North. Under any scenario that pits France, Italy and Spain against Germany, you have to factor in the clear advantages Germany gains from within the Euro, versus the domestic strains if it becomes increasingly sidelined and the enormous potential costs of exit on the third axis!

That German dynamic is constantly moving as it becomes increasingly entangled in Europe (just look at the rising internal bop Target 2 balances owed to Germany!). At some stage it will lead to austerity being replaced. With what? Growth policies? In a Eurozone so diverse in terms of employment, productivity, and competiveness, growth policies have to be country specific. If the Euro has conclusively proved one thing it's that "one size fits all" monetary policies don't work for a union as unsimilar as the Eurozone. But entrusting Eurozone countries to repair themselves is utterly heretical to core Europe, raising the prospect of uncontrolled spending. Yet more airports in Spain anyone? Unlikely.

So what about something utterly radical - like simply cancelling government debt?  See Gavyn Davies I the FT yesterday. He wrote: “One radical option which is now being discussed is to cancel (or, in polite language, “restructure”) part of the government debt that has been acquired by the central banks as a consequence of quantitative easing (QE).”

Recently a very experienced leading sovereign default lawyer explained to me and some colleagues a plan for a similar “European Deleverage Programme” that would see sovereign debt/and bank assets addressed simultaneously – radical and then it sounded very unlikely. But perhaps such a radical cancellation of European debt and monetisation is the only answer.

From a market perspective, it feels like the ground is shifting. What should investors be doing if austerity is becoming less invasive – that certainly keeps the European can kicking further down the proverbial road. That’s market positive!

And, if European governments are even thinking about thinking about something radical like cancelling debt – how will that effect current sovereign investments? Reducing supply should create scarcity, but printing money is an inflationary anathema to the Bundesbank! How will the central bank be recapitalised if it writes off its assets without money printing – why not when inflationary expectations are low? And what would it do to banks?

So lots to think about. Future looks very interesting.

 

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Tue, 10/16/2012 - 09:41 | 2894144 francis_sawyer
francis_sawyer's picture

Somebody's avatar just got punked...

Tue, 10/16/2012 - 09:42 | 2894159 GetZeeGold
GetZeeGold's picture

 

 

Dazed and confused in Euroland.......that's pretty normal.

 

Tue, 10/16/2012 - 10:10 | 2894503 asteroids
asteroids's picture

Spain has pulled out its red cape and is getting the German bull to charge. Ole!

Tue, 10/16/2012 - 11:33 | 2894818 centerline
centerline's picture

Huh?  (lol)

Tue, 10/16/2012 - 09:44 | 2894213 PUD
PUD's picture

Harry Potter and the magic printer. Available as a downloaded Iapp

Tue, 10/16/2012 - 10:02 | 2894466 CPL
CPL's picture

Interest Rates Leviosa! <wand flick>

Tue, 10/16/2012 - 09:45 | 2894230 ShortTheUS
ShortTheUS's picture

Euro nations seem to be oblivious to the fact that they have a FIAT currency and keep refusing to do the simplest thing to do when debt spirals out of control. (Ctrl+P^infinity). Deal with the consequences of it later, but more austerity is the lesser of two evils ATM.

Tue, 10/16/2012 - 14:46 | 2895719 Peterus
Peterus's picture

There is a lot of talk about austerity but in reality there is none. Spain had in last year a drop in speding to GDP ratio that put it about two years back. Everywhere else it is just slowed rate of spending growth. It's mostly tax raises and these are suprisingly not a road to prosperity...

Austerity would be to go from 40-60% govt spending to GPD that now is normal in Europe to 20-30%. There is no way to do this. Whoever would do real austerity would never have a chance to get elected. It would piss off innumerate interest groups that would obliterate that party. Even slower spending growth in Greece seems like end times. So it won't be done. Until system collapses, or maybe, just maybe until a few countries go down in flames and paradigm shifts even in those that will be still afloat.

Debt jubilee is a good idea, but it does not render govt spending reconstruction obsolete. It's not like Asia will get 100% haircut and than starts lending to Europe again.

Tue, 10/16/2012 - 09:46 | 2894243 Inthemix96
Inthemix96's picture

Francis,

I cant see centerline being to happy about tyler nicking his moniker, if you know what I mean.............

;-)

Tue, 10/16/2012 - 09:53 | 2894432 francis_sawyer
francis_sawyer's picture

That's why my avatar is never likely to be punked... Because if any of you, homos, touch me, I'll kill you...

Tue, 10/16/2012 - 10:00 | 2894459 IndicaTive
IndicaTive's picture

Thanks for the laugh..

Tue, 10/16/2012 - 10:01 | 2894462 Inthemix96
Inthemix96's picture

Hehehehehe,

Nice, promise it wont be me then.

Tue, 10/16/2012 - 09:46 | 2894256 LULZBank
Tue, 10/16/2012 - 09:55 | 2894442 GetZeeGold
GetZeeGold's picture

 

 

OK....I was just over on Drudge and apparently Obama is waging a war on women.....what the hell is up with that?

Tue, 10/16/2012 - 10:07 | 2894485 CrimsonAvenger
CrimsonAvenger's picture

They know what they did.

Tue, 10/16/2012 - 10:24 | 2894562 LouisDega
LouisDega's picture

Whats a Drudge?

Tue, 10/16/2012 - 10:32 | 2894610 GetZeeGold
GetZeeGold's picture

 

 

It's kinda like a door Matt.....but he's a real person.

 

Tue, 10/16/2012 - 10:38 | 2894621 nmewn
nmewn's picture

"I was just over on Drudge and apparently Obama is waging a war on women..."

Another Obama battery plant going bankrupt?

Tue, 10/16/2012 - 09:49 | 2894267 alstry
alstry's picture

As technology replaces more and more jobs.....we will all soon start milking each other in the http://www.udderworld.com

We are simply advancing from the Industrial Age to the Knowledge Age.....but if I recall, advancing from Agriculture to Industrial was met with a few convulsions.

We all liked being horse and plow farmers...until there was change.  Now we like being factory workers and meaningless financial services workers even though technolgy can replace us much more efficiently.

As we proceed through this change, expect lots more convulsions as no politician is ready to address it right now.

 Just wait unil FoxConn replaces all of its factory workers with robots in the next few years...nobody will have to jump anymore;)

Tue, 10/16/2012 - 09:51 | 2894385 Bastiat
Bastiat's picture

One of my frowned upon questions in grad school:  if 10% can produce the necessary food, clothing and shelter, what are the rest supposed to do?  And how does distribution work if they don't. 

Tue, 10/16/2012 - 09:54 | 2894439 alstry
alstry's picture

For goods and services that are digital (ie books, mail, music, games, education)...there is no distribution issue or resource consumption.

For other things, we can restructure cities and self-driving vehicles will be a good transition as we increasingly milk off technology and not each other.

http://www.forbes.com/sites/singularity/2012/09/06/self-driving-cars-from-google-on-the-road-toward-approval-in-california/?ss=innovation-science

Tue, 10/16/2012 - 10:06 | 2894469 LawsofPhysics
LawsofPhysics's picture

The issue no-one, not even the shills in the links above, want to address is the fact that growth of the human population and maintaining a decent quality of life are not sustainable, period.  There is no free lunch, period.  You don't get something from nothing.

There are hard fucking limits to even the most opptimistic technological possibilities.  Moreover, these possibilities will require massive amounts of capital and resources to develop.  

Fine let's be optimistic and say that we can develop these technologies.

So how do we insure that the remaining capital and resources are not mis-allocated or mal-invested?

Simple, we allow bad business models, bad management, and bad motherfucker to FAIL, i.e. no fucking bailouts.

Good luck with that, as this fundamental paradigm shift will require those in power to indict themselves.  Ain't gonna happen.

Tue, 10/16/2012 - 11:33 | 2894819 venturen
venturen's picture

Wait I got free lunch yesterday...do I have to give it back?

Tue, 10/16/2012 - 11:53 | 2894915 LawsofPhysics
LawsofPhysics's picture

Given the avaerage time it takes a person to digest food, you probably already have.

Tue, 10/16/2012 - 15:15 | 2895809 Peterus
Peterus's picture

Most optimistic technological possibilities is 100% efficient capture of Solar energy, colonisation of Solar system, vats grown food, etc. Earth could easily house 100 billion people at "most optimistic...". Also not every technological advance needs costly development, so in a land of fairy tale super breakthroughs all these problems fade.

Tough you're right. In any realistic scenario end of material scarcity is nowhere in sight. Same thing about employment. Even if 10% of population could "do all the manufacturing" this is only one kind of desired goods. Also you can always double the number of engineers and designers to manufacture better/more customized/more varied stuff. There is no limit upper to services sector employment etc.

Tue, 10/16/2012 - 19:03 | 2896372 toomanyfakecons...
toomanyfakeconservatives's picture

There is loose talk of WWIII going around. This is serious stuff. Meanwhile, at the local pizza shop, everyday Americans are talking about debt, financial tyrrany, JFK, the rape of the Constitution, and why no justice whatsoever has been done.

 

Speaking of people in power not indicting themselves, let's do it for them. It's been mostly posturing so far on the world stage this year, but everybody knows the jig is up. The non-aligned nations (BRICS and over 100 other nations) and the "good guys" can bypass the U.S. dollar for international trade with the flip of a switch. Only trillion dollar liens against the FED and BIS can right the wrongs of stolen gold and the petro dollar. 

 

It really looks like either a MASS ARREST event takes place at the highest levels, or nuclear missiles might be flying overhead.

Tue, 10/16/2012 - 09:53 | 2894430 new game
new game's picture

when it all looks sooooo fucked up, step back, relax and it will become clear!  the plebs will fight over what little remains.

Tue, 10/16/2012 - 10:13 | 2894513 LULZBank
LULZBank's picture

Haha... Thats what Im planning on too. Stupid people get stupid and then stupid people get angry.

Tue, 10/16/2012 - 09:54 | 2894436 Shevva
Shevva's picture

In a modern society one would hpoe you would ask the people of the country then again there is nothing democratic about the EU.

Did Germany keep all the assets it nicked in WW1 and then ww2 because if you run out of money you can always hop over the fence and nick your neighbours washing.

Tue, 10/16/2012 - 09:57 | 2894454 Inthemix96
Inthemix96's picture

Confusion reigns in europe?

Seeing as I live here, I do believe, along with a miriade of reliable sources, from some of the most reputable publications known inside this great and diverse continent, kept away from prying eyes who could have mistrued the information we have available to us, that are you fucking surprised?

Confusion reigns in europe?  Course it does, it always bloody has?????

Tue, 10/16/2012 - 10:22 | 2894557 WhiskeyTangoFoxtrot
WhiskeyTangoFoxtrot's picture

Where's Centerline?

Tue, 10/16/2012 - 10:25 | 2894577 Ignorance is bliss
Ignorance is bliss's picture

Accept printed worthless linen and loose sovereignty joining the ranks of Greece. I think Spain exits the E.U.

 

Black swan landing

Tue, 10/16/2012 - 11:19 | 2894764 venturen
venturen's picture

You meant to say Contagion. 

Tue, 10/16/2012 - 11:20 | 2894767 venturen
venturen's picture

Buy helicopters and print...just like us. Our debt is a lot higher than Spain's.

Tue, 10/16/2012 - 12:23 | 2895037 Dareconomics
Dareconomics's picture

Spain is telling the international press and domestic press two different things. Click through to the El Pais article (in english) from here:

http://dareconomics.wordpress.com/2012/10/16/spain-doubletalks-to-domest...

Apparently, Spain wants the ECB to agree to holding Spanish yields to within 200 basis points of German bunds.

Tue, 10/16/2012 - 12:33 | 2895074 falak pema
falak pema's picture

If Austerity doesn't work then this implies that Draghi is right to print!

You cannot be anti-austerity today in Europe and then say Europe is wrong to print, print, print...

France is a good example. Should it reduce its debt on pull its pants down to the Oligarchs, who want no taxes but cannot guarantee growth, whatever the tax rate and with money thrown at them at zero interest! 

First world is in a lose- lose conundrum. And nobody  has any idea how to move out of it; as every buck making scheme by the Oligarchs does so thru slave laboured investment OUTSIDE first world.

Until we bring back work to first world and create growth at home we will be running after the proverbial pot at the end of the rainbow! There are many ways to do this and we should be using all of them; in a structured way...but that means structured thinking; which is the contrary of current knee jerked, fiat pumping to help Oligarchs invest abroad and stock their profits off-shore thanks to corrupt banks and the crony politicians.

Tue, 10/16/2012 - 13:13 | 2895247 toomanyfakecons...
toomanyfakeconservatives's picture

The problem is, the world wants it's stolen gold back and parts of Europe are knee deep in that mess.

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