On GRExit, SPAilout, And Draghi's White Knight
Via Mark E. Grant, author of Out of the Box,
“There was a free lunch just once. It was when Eve gave the apple to Adam and we all know how that turned out.”
As I stare out at the Maginot Line I will endeavor to predict the upcoming events in Europe for the balance of the year. I called Greece, Ireland and Portugal correctly so I have some standing here and while we all are only as good as our last call; I have my own small pin on which to dance. I think first and foremost that Greece falls by the wayside. I think as a matter of political reality, given the German polls, that Berlin will refuse to adequately fund Greece and that they will be forced back to the Drachma as a matter of Ms. Merkel’s desire for re-election. When this happens it will be a quite messy affair with some $1.3 trillion going into default which will also require the re-capitalization of the ECB and there will be a $90 billion hit in derivative contracts which may well affect certain banks past the point of what is currently recognized. The Greek banks, bankrupt now, will train off into the abyss and will be replaced by other European institutions. The honest truth is that the Greek debts have become so large and so impossible to pay that unless there is absolute debt forgiveness, which I think is politically impossible in Germany and a number of other European countries; the country must roll over as a matter of fiscal reality.
“What I'm not saying is that all government spending is bad. It's not - far, far from it, but there is no free lunch, as a former colleague of mine used to say. There is no public tooth fairy. Father Christmas does not work on the Treasury staff this year. You can never bail someone out of trouble without putting someone else into trouble.”
In March, the last figures that are available, the Spanish banks lost $66 billion of capital as the citizens of Spain moved their money to safer havens. What the LTRO gave the populace took away and the situation is unsustainable. Spain will soon be forced into a full-fledged bailout in my opinion which will require money for the regions and for the banks. My best surmise is about $350-400 billion that will be required and while it may come in tranches; that will be the total. This will then shift the focus to Italy in the short run and then onto France and Germany and just how much can be afforded in this rush into financial imprudence dictated by trying to maintain a Union that can no longer stand under its own weight or national interests. The debts in Europe are no longer trivial and someone has to pay in the end. Free money, even printed money, is never really free and always has consequences which would be the downgrades of Germany and France in the short term and all of the increased costs of funding that would come with it.
“There is no such thing as a free lunch.”
I think what amazes me the most is that so many people have the honest opinion that Sir Draghi is going to come charging out from the round table, from the gilded gates of the ECB and save Europe. That White Knight is subject to the whims of Germany and the rest and all of the talk of independence and the separation of Church and State is just that; talk. I fear these people are hitching their wagon to some shooting star that won’t shoot. Blitzen, Donner and the other reindeer are still out in the pasture fattening up for their Christmas ride and are not available to bring presents this early in the year. The holiday season will be upon us in due course but Santa is not Italian and Fettuccini Mario will not be served. I am afraid, long before December, that disappointment will be the main course and that the gruel will be apportioned.
In this world there are mice and there are men. Men learned long ago to offer a free lunch in the mouse trap. One mouse after another has learned the consequences of eating it.