Bill Gross On Why Europe's Plan "To Get Your Money" Is Doomed

Tyler Durden's picture

The very vocal head of the world's largest bond fund has long been critical of the global ponzi system better known as the "capital markets." Now, finally, he shifts his attention to Europe, where the interests of his parent - Europe's largest insurance company Allianz are near and dear to the heart, and deconstructs not only the biggest challenge facing Europe: getting access to your money, but also the fatal flaws that will make achieving this now impossible. To wit: "Psst! Investors – do you wanna know a secret? Do you wanna know what Angela Merkel, François Hollande, Christine Lagarde and Mario Draghi all share in common? They want your money!" .... but... "private investors are balking – and for what it seems are good reasons – because policy makers’ efforts have been, until now, a day late and a euro short, or more accurately, years late and a trillion euros short." And so they will continue failing ever upward, as permissive monetary policy which allows failed fiscal policy to be perpetuated, will do nothing about fixing the underlying problems facing the insolvent continent. Then one day, the ECB, whose credibility was already massively shaken last week, will be exposed for the naked emperor it is. Only then will Europe's politicians finally sit down and begin doing the right thing. It will be too late.

From the FT:

Draghi and friends just want your money

Psst! Investors – do you wanna know a secret? Do you wanna know what Angela Merkel, François Hollande, Christine Lagarde and Mario Draghi all share in common? They want your money!
They’ve wanted it for years now but you are resisting by holding on to it or investing it at negative interest rates in Switzerland, Germany and a growing number of other countries considered to be European Union havens. They want you to be less frugal and more risk-seeking. They want your money as a substitute for theirs in Spain, Italy and, of course, Greece, but they don’t mention that any more. The example would be too off-putting. “Investors,” they plead, “show us your money!”

The ultimate goal of monetary and fiscal policy in the EU is to re-engage the private sector. The EU needs the private sector as a willing (but not necessarily equal) partner in funding its economy. This often gets lost in the noisy details of all too frequent promises such as the one to defend the euro made by Mr Draghi, European Central Bank president.

Investors get distracted by the hundreds of billions of euros in sovereign policy checks, promises and IOUs that make for media headlines but forget it’s their trillions that are the real objective. Even Mr Hollande in left-leaning France recognises that the private sector is critical for future growth in the EU. He knows that, without its partnership, a one-sided funding via state-controlled banks and central banks will inevitably lead to high debt-to-GDP ratios, rating service downgrades and a downhill vicious cycle of recession.

But private investors are balking – and for what it seems are good reasons – because policy makers’ efforts have been, until now, a day late and a euro short, or more accurately, years late and a trillion euros short. Let’s look at some examples of this.

First, Greek bailouts that included private sector involvement but no official sector involvement, resulting in the inevitable investor conclusion that future programmes for Spain and Italy might resemble the same.

Second, an initial tightening and then a reluctant lowering of ECB policy rates.

Third, a bond purchase programme (securities markets programme or SMP) by the ECB that was too small and prematurely abandoned.

Fourth, fiscal austerity packages for individual countries that accelerated recessionary/depressionary growth paths.

Fifth, public fights among northern and southern EU countries that highlighted the seemingly perpetual dysfunctionality of the eurozone 17 and the EU 27.

Finally, Mr Draghi’s reversal last Thursday. Someone must have got to him between London and Frankfurt.

Policy makers now face an unprecedented expansion of risk spreads and credit agency downgrades which almost guarantee that sickbed countries can never be discharged from intensive care.

Investors misguidedly focus on 7 per cent yields in Spanish and Italian bond markets as some sort of high watermark – below which swimmers can safely touch bottom. But even at 7 per cent deep, the toes cannot stretch. Maybe even 4 per cent is not shallow enough.

Interest rates over and above each country’s nominal GDP growth rate will inevitably add to a country’s debt as a percentage of GDP, even if budgets are in primary balance.

At current yields, growth rates, and deficits, the spread may incrementally add 2-3 per cent to Spain and Italy’s tenuous debt ratios every year. While it is true that both countries can shorten maturity offerings and even accept the benefit of prior terming of their debt stock, eventual drowning will occur even at 4 per cent or higher 10-year yields as long as nominal GDP growth is anywhere close to flat.

Policy makers will solicit the private market’s participation in an effort to get there, by attempting to lead via co-ordinated monetary/fiscal efforts involving the SMP from the ECB and hundreds of billions of euros from bailout funds – the European Financial Stability Facility and ultimately the European Stability Mechanism. But without the private sector’s co-operation, the effort may be futile.

The dirty little secret that sovereign debt issuing nations need to remember most of all is that credit and maturity extension is based upon trust. After all, “credere” is a Latin word meaning just that. After trust has been lost due to half-baked policy measures; after credit agencies belatedly have recognised embedded costs of debt that can no longer insure solvency; after marginal investors have been flushed from the system to what appear to be safer return of principal havens; and after policy makers finally appreciate the fragility of their rigged fiscal and monetary system; after all of that – there is no coming home, there is no going back in the water.

Psst investors: Stay dry my friends!

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Ted Baker's picture


Snidley Whipsnae's picture

Buying Italian/Spanish soverign bonds at ~ 7-8% or US bonds at ~ 0%...

I'm in favor of the US bonds... cause it's hard to take a haircut on 0%.

ArkansasAngie's picture

Preservation of capital?


If you give your money to these yahoos then please do not call me later and ask me to share in your loss.


Enabling and codependency?  The problem with addicts is that they lie.



old naughty's picture

"...I am in favor of the US bonds..."

Did Gross said that (not in so 'few' words)?

Oh, tHEy want(s) your money alright!

Snidley Whipsnae's picture

I didn't say that I owned any soverign bonds... and, I have yet to receive any 'bailout' help.

Lie? Yeah, I lie about the number and size of the fish that I catch... :) I like fish... They are physical; like some of my other preferences.

"If you give your money to these yahoos then please do not call me later and ask me to share in your loss."

Snidley Whipsnae's picture

Everyone lies... if only a white lie to avoid hurting the feelings of someone you like; it's still a lie.

Sean7k's picture

That's hitting the nail on the head. Central banks can create money, but they cannot create capital. Capital must be pried from the accounts of private capitalists. If the private sector refuses to participate, it is game over.

The banks need a way to transfer private capital to their ledgers. Unfortunately, not all capitalists are bankers or stupid. The banks are withdrawing capital, which they have done prior to every market crash. The apex moment is when private capital and the ability to tax are compromised- then it's morgan time!

dead hobo's picture

Mr Whipsnae,

Here is a question all investors should ask themselves:

Would you invest you wife's or elderly mother's retirement savings in Greek or Spanish or Italian sovereign debt?

Snidley Whipsnae's picture

I don't invest for others regardless of their marital status or number of dependents.

I did buy some long dated US paper in the early 80's. It's still yeilding 13% and will continue to do so untill 2013.

Would I buy some Italian or Spanish debt if it was yeilding 13%? Maybe.

Regardless of the continual pounding by ZH regarding the imminent destruction of all things European... I continue to think for myself.

Do you?

CheapBastard's picture

When interest rates regress to the norm and treasuries fall, 0% return will look good in retrospect.

LostAtSea's picture

You can still take a haircut on return OF capital.

NidStyles's picture

This si what all governments do once they have pushed the Ponzi scheme to the point where it becomes obvious that they have no intention of paying back anyone. 

eddiebe's picture

Yes, at some point Bill will be right and the bottom will drop out of sovereign bonds. The real question is when? As it stands now, a whole lot more people listen to Ben and even Mario than they do to Bill.

Meesohaawnee's picture

uh bill. the us equity market is trying to do the same. duh! so tired of this staged ramp job. hope your happy obama!

tok1's picture

mm he wouldn't be long treasuires and MSB  and face poor performance if EU siutation was resolved and subsequently he'd be stuck with all the US tres he bought at sub 2% recently...

ahh no he wouldnt talk his huge position.. 

I am sure he's selling tres today and puying some higher yields in EU as he talks the opposite..


Monedas's picture

First they TTFOOY (tax the fudge out of you) .... then they come for your savings, your property and your GOLD !

MillionDollarBoner_'s picture

...and then your teeth, your hair and your hide...

Dina Strange's picture

Do I think Europroject was a bad idea from the start? Perhaps not! Was it designed with an implicit goal to benefit the few, def. yes!

EvlTheCat's picture

All I know is, at this point, I trust my Allianz account because it is giving me the highest return on investment.  Everything else is schizophrenic.

Gold and silver are close runners up.  But I came to the game later than some, but not as late as others.

caimen garou's picture

they could beg for money like obama is doing, ask for your wedding gifts,sell your blood,or even sell your first born! nothing surprises me anymore.

XitSam's picture

Bill, the politicians don't want my money, they think they rightfully own it already.

buzzsaw99's picture

fidelity would be happy to give them your money

HD's picture

So, is it safe to assume Allianz is the next AIG if the EU all goes to hell?

Mercury's picture

Then one day, the ECB, whose credibility was already massively shaken last week, will be exposed for the naked emperor it is. Only then will Europe's politicians finally sit down and begin doing the right thing. It will be too late.

Yeah, either that or they'll just take your money....

orangegeek's picture

Europe is doing all they can to avoid "facing the music".  The music?  Socialism is finished. 



Nachdenken's picture

Caught between coming home, and water, sail forever on the Flying Goldman. 


Robslob's picture

Definition of "Plot"aticians:
Finally sitting down and begin doing the right thing only when It will be too late!

Floodmaster's picture

Inflation through loans is over, they will try to create inflation with the stock market. We're seeing a reverse trickledown where the rich get ritcher. A peasants' tax (money printing/no trickledown) with the following peasants' revolt.

disabledvet's picture

So they steal money. Then what?

Poor Grogman's picture

If the Euro has had it's day.

Why not try the "Fluoro"

My latest idea to "save the EU"

I invite Mario to introduce a new currency that could also be used as a flashlight thus solving the energy storage issue as well as giving the money that much needed "intrinsic Value" that all the austrians carry on endlessly About.

The new Fluoro is a brilliant idea that could light the way forward for the embattled EU countries.

I am willing to donate this idea for a small percentage of the profits if Mario finds it useful....

DavosSherman's picture

When will people realize that bankers are identical to Hitler et al?

CrawdadMan's picture

I thought Gross was supposed to have no credibility on ZH.

Bob Sacamano's picture

A high percentage of the material here is from despised, agents-of-evil ("no credibility") sources (Gross, JPM, Citi, GS, etc) and frequently is presented in a way to suggest the data/opinion is accurate and relevant (not corrupted and not just to present alternative view points).   Understand more posts create site traffic, but......  

Lednbrass's picture

Dismissing something outright due to who said it is a mistake I think, what really matters is what is said and how well it corresponds to reality. Someone who is clearly wrong 90% of the time can still hit the bullseye on the other 10%.

This is a big problem in the US where a large chunk of people will not even listen to the most factually based argument based on hard statistics if the argument is made by someone they don't like, or even worse on the other "team".

Dareconomics's picture

As I have pointed out on this blog, the southern European countries need private investors to finance their debts. Specifically, countries running trade and budget deficits need foreign investors to finance these deficits because there is not enough domestic money.

All of the schemes, plans and promises emanating from central bankers, politicians and eurosummits are bids to get private foreign investors back into the sovereign  debt market.

Why would they? Euro institutions have de facto seniority, and we all saw how private investors got treated during the Greek bailouts. Furthermore, the failing countries have yet to take significant steps to improve their abilities to pay (i.e. slash entitlement programs, raise retirement ages and reform their internal markets).

Once the markets lose confidence in an entity, it's gone. Does anyone know of an entity that lost access to the credit markets and then returned without declaring bankruptcy or enduring some other type of restructuring?

Obnoxio's picture

I know some people that have annuities with Allianz and can't get their money out exept a small percentage per year. Many people have money tied up in investments that may not survive a financial melt-down.

Lost Wages's picture

Stop Euro-row-rowing the boat gently down the stream. Kick Germany overboard and start the Ctrl-P Draghi Yacht Race to the bottom!

WhiteNight123129's picture

Germany is forcing ECB to ask for conditions of lower government spending in exchange for printing. IT could blow up, but if they succeed USD is out of business. Maybe USD is out of business anyway, what do I know?

gwar5's picture

Yes, CBs have lost all credibility but the IMF and a World currency will be there to catch them. The banker Ponzi will move to the next level to save them and wipe us out in any conversion to an IMF SDR. CBs don't care which vessel they use as long as the little people can be forcecd to use it. 



Lednbrass's picture

As the US is (I believe) the single largest funder of the IMF, would there really be the political will in the US to do that? In theory you may well be right but I am not sure it would sell here, that would probably be radioactive for any politician backing it and I'm not sure Lagarde has enough in her pocketbook to handle it otherwise.

I also suspect if she ever got serious about SDR's there would be an immediate sex scandal involving a third world pool boy, the timing with her predecessor on that was not coincidental.

silverserfer's picture

keep a clear focus, the currency wars are the signal that this moneatry cycle is about to end. this has been planned its only apears chaotic from the perspestive of us small folk. money grabbing and theft will only increase. the only way to survive the maddness is to subscribe to Ghraham Summer's newsletter. Kidding. Put all your money in SLV! No that would be stupid too. Binderman towels? No. I guess it is all about the gold isint it?


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