The Ugly Truth For Northern Europeans

Tyler Durden's picture




 

As Europe's exuberance from the LTROs fades (with Italian banks now negative YTD, Sovereigns wider than LTRO2 levels, and financials desparately divided by the LTRO Stigma) Jefferies David Zervos uncovers the sad reality that faces peripheral creditors and Northern Europeans - as we noted a month ago here. The 'success' of the LTRO monetization scheme (as opposed to EFSF/ESM transfer dabacles) is what enabled the Greek restructuring, and as Zervos notes, the losses that the big boys (Spain and Italy) need to take will not be taken via a haircut but a monetization as the number 1 rule is we must always assume that losses will be taken in a way that protects the large northern banks, northern jobs and most importantly Northern politicians. If the loss realization is not managed correctly (and losses there will be), then the ugly truth will escape but the North's large-scale vendor-financing scheme with the periphery will have to continue - even in the knoweldge that the debt will never get paid back.

The income and savings of Northern workers must be ploughed (directly or indirectly) into the rest-of-Europe or the entire structure becomes insolvent and the breaking of that social contract (that they will be looked after when they are old) will inevitably lead to revolt and nasty nationalist political forces being unleashed. The hope to avoid this is the 'wealth illusion' as the workers of the north can never be allowed to realize they have only 50% of their worth in reality. Ireland will be next on the loss-realization-monetization path but as we move from relatively small and containable sovereigns to the big-boys, the idea that Spain and Italy will roll over and accept a decade of austerity in exchange for a haircut is pure folly. These countries hold too much clout in the Eurozone and their threat of
exit is a material threat to the northern jobs and hence northern politicians. The only way the northern politicians will be able to save face when it comes to Spain and Italy is through massive monetary policy accommodation. Inflation will rebalance Europe; but let's hope that the process of restating northern wealth and wage rates does not lead to revolt in the northern streets. The politicians will need to carefully execute this trade.

As we noted a month ago...the sad interconnected vendor-financing, wealth illusion reality that is Europe...


The Ugly Truth - Northern Europeans Have Worked For Naught


While writing at Jefferies over the past few years, I have rarely put forward a bullish case for European investments - bonds or stocks. I recall in the summer of 2011, as sentiment soured quickly in Italy and Spain, I argued vehemently that the Europeans would not let a single country default until they had an effective backstop/firewall in place. Implicitly, that may have been short term bullish, but it was just a bet that chaos would not be unleashed without a proper mechanism to control the side effects in major northern European markets.

The LTROs were the firewalls, and as their success was realized, the case for a managed Greek default could clearly be made. We have now moved past a successful haircut process in Greece. And the poor saps who bought Greek debt anywhere from par down to 30 cents had their clocks cleaned. I don't know how many times I heard from talented money managers around the world that Greek bonds at 70 or 60 or 50 were a great investment. For them, Greece would never be let go - sovereign European debt had the Trichet stamp of "money good". Worthless!

Of course, in the end, it was just a matter finding the right firewall structure before the creditors were torched. And going forward, the rest of the loss realization process in Europe MUST commence - starting in Ireland and then onto Spain, Portugal and the big Kahuna, Italy. In some fashion, creditors to these nations will ultimately be stuffed - either through inflation or a haircut. These countries will never be able to pay off their debts in “real” euros. And as I will argue below, for the big boys, the losses will never be realized via a haircut, but only through monetization.

The most important factor to consider as we go through the remainder of this loss realization process is politics – we must always assume that losses will be taken in a way that protects the large northern banks, northern jobs and most importantly northern politicians. That is the number one rule! German and French leaders can never go back to their voters and tell them the truth. The northern working classes have jobs, pensions, insurance contracts, annuities and wealth that are all tied to the peripheral market's ability to pay back its debts. If the process of loss realization is not managed carefully, then the workers/voters will immediately see the ugly truth.

And what is this ugly truth? Simple - that in order for the mercantilists of the north to have these jobs, and to sell their wares, they have had to put large portions of their income into savings that was backed by the worthless debt of their target export markets. The north has executed a classic vendor finance structure, with no chance the financing will ever be paid back. The northern voters have basically been working for a fraction of their stated wage rate - their politicians have lied, but so far they have not been caught. The masses have jobs, and a social contract that says they will be well-looked after when they are old. That contract however is ultimately null and void.

In the event of a mass default, euro break-up or EMU unwind, this ugly truth will become immediately transparent. The entirety of the northern financial system will be insolvent - pension funds, annuities, insurance contracts, and most importantly, jobs will be destroyed. The workers/voters of the north will quickly realize that all their toiling and saving over the last few decades was for naught. There will be revolt in the streets and some very nasty nationalist political forces will be unleashed. This is by far the most frightening risk in the European debt crisis evolution process.

While there is always a chance that such a horrific outcome could come to pass, it is certainly NOT the most likely path forward. Northern politicians have no incentive to come clean with what they have done. They will instead use every means necessary to ensure that "wealth illusion" is preserved in northern Europe. The workers of the north can never understand that they really only have 50 percent or less of their real current wealth.

As stated above, the best way to predict the way forward in Europe as a whole is to look at the political process in the north. Greece was cut off and eventually let go because it suited the political goals of the north. Vilifying Greek largess was much easier than blaming corrupt northern lenders and defense contractors. Greek debt was the fuel that generated many northern jobs - but no northern voter wanted to hear that. They wanted to blame someone else for their financial sector woes. Importantly, the leaders of the north concocted a way for Greek debt to be extinguished without transparently destroying northern wealth or jobs. The EFSF, ESM and LTROs were all part of the obfuscation process. And the transparency of the transfer process in the EFSF and ESM never took hold, it was only the monetization process of the LTRO that finally did the trick. That is important! Monetization works well and sells well – transfers do not.

The next loss realization will take place in Irish sovereign debts that were originally racked up by Irish banks - remember the ones that require payments of 2 percent of GDP in perpetuity back to northern creditors. If the Irish play ball, and insure that their economic competitiveness is shredded via the fiscal compact in this coming referendum, then maybe they will get some payment relief. In other words if they agree to policies that ensure northern jobs are not threatened near term, then their debt service will be reduced. That trade off works for northern politicians – they keep the northern job market healthy and slowly take the losses associated with bad peripheral lending. Again, Irish debt haircuts can probably be contained like the Greek ones were – they are small enough in the grand scheme.

What the north cannot have is immediate losses in voter wealth followed by a surge in competitiveness from the south. If that happens en mass the northern politicians are dead - the jobs and hence the votes are lost. They need to keep Greece, Ireland and the remaining peripherals uncompetitive while they go through this loss realization process. That is the only way northern jobs are preserved. This is why we see a non-stop obsession with austerity in exchange for debt relief.

But as we move away from Greece and Ireland, the loss realization process becomes much more complex. In Greece, the north was able to control the political process - but others will recognize the benefits of a competitive devaluation. Maybe Ireland steps up, and wrestles control from the Euroarea leaders. Maybe the voters recognize that those debts at Irish banks were the fuel that created German jobs. Or maybe the Irish fall down like Greeks and let the Euroarea leaders hold their economy hostage for the next decade. It could go either way frankly. But the idea that Spain and Italy roll over and accept a decade of austerity in exchange for a haircut is pure folly. These countries hold too much clout in the Eurozone and their threat of exit is a material threat to the northern jobs and hence northern politicians. A Greek, Portuguese or Irish threat is simply not relevant.

The only way the northern politicians will be able to save face when it comes to Spain and Italy is through massive monetary policy accommodation. The ECB will yell and scream, but the loss realization process will have to go through the Euro, inflation and the traditional forces of financial repression. Italy will not exchange a haircut for a decade of austerity. They don't have to! In addition, an Italian or Spanish haircut will make the debt for jobs trade too obvious. It will hit the northern saver transparently and aggressively.

The north cannot allow their financial system and their voters' wealth to be transparently destroyed via Italian and Spanish haircuts. The process of default break-up and exit cannot escalate - it will be political suicide in the north. As we have argued many times, there is a reasonable chance Greece, Ireland or Portugal exit. In fact, political forces in north may benefit strongly if they leave. But the idea that Spain, or especially Italy, could leave is another matter entirely. Euro area inflation will almost certainly be used to solve Italy and Spain's competiveness and indebtedness problem. Of course the side effect will be wealth destruction and inflation in the north.

One way or another wealth will be transferred from the north to the south. And the most important point is that stated northern wealth is simply a mirage. They never really had it and they have been working for many decades for a wage rate that is a small fraction of the advertised level. The only way a northern worker was able to be paid such a high "stated" wage is that a big chunk of the paycheck went to feed a pension and savings structure which was recycled into worthless peripheral debt. Inflation will rebalance Europe; but let's hope that the process of restating northern wealth and wage rates does not lead to revolt in the northern streets. The politicians will need to carefully execute this trade.

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Tue, 04/03/2012 - 08:58 | 2312501 vmromk
vmromk's picture

I still say FUCK YOU Bernanke.

Tue, 04/03/2012 - 09:00 | 2312503 GetZeeGold
GetZeeGold's picture

 

 

Contrary to the ugly rumors...he is not a Northern European.

 

Tue, 04/03/2012 - 09:06 | 2312526 battle axe
battle axe's picture

ie: Germany get the hell out of there and ring fence your banks, because the hammer is coming down. 

Tue, 04/03/2012 - 09:30 | 2312586 ATM
ATM's picture

It's too late for them. What those banks "own" is empty promises or outright lies and everyone knows that.

what's interesting to me is that as I read through this I could substitute 'US' for "northern europe" in almost every instance and the thought process worked perfectly.

 

Tue, 04/03/2012 - 12:04 | 2313229 LowProfile
LowProfile's picture

Think you meant "US pensioners".

Not to mention "PBOC".

Tue, 04/03/2012 - 12:38 | 2313370 Nussi34
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"but let's hope that the process of restating northern wealth and wage rates does not lead to revolt in the northern streets. The politicians will need to carefully execute this trade."

 

Let´s hope there will be revolt and the bastards that led us there will be hung!

Tue, 04/03/2012 - 12:53 | 2313433 Madrid2020
Madrid2020's picture

As Rajoy in Spain is prone to say "Those balls in my hands are German!" Now cough,or better yet cough up!

Tue, 04/03/2012 - 09:16 | 2312549 vmromk
vmromk's picture

He is a swarthy SCUMBAG not fit to lick the shit off my shoes.

Tue, 04/03/2012 - 09:07 | 2312531 Nussi34
Nussi34's picture

I still say FUCK THE PIFGIBS and the crappy calculation unit called Euro. The Euro is not a currency, currencies do not need to be rescued and also have a value storage function, which the Euro does not!

Tue, 04/03/2012 - 10:25 | 2312826 Gordon Freeman
Gordon Freeman's picture

The "Northern Streets"???  What a load of horseshit!  What are they going to do? Throw their croissants?  No, they will roll over, and do exactly as they're told by their overlords, just like the masses here in the US.

Tue, 04/03/2012 - 11:01 | 2312984 Schmuck Raker
Schmuck Raker's picture

Yeah, the French burning croissants would be like Germans burning BMWs....oh, wait...

Tue, 04/03/2012 - 09:55 | 2312677 Tarheel
Tarheel's picture

Germany and other northern european countries should wise up soon and accept only gold payments instead of fiat money for the debt they buy from SPAIN, GREECE, etc. etc.

Tue, 04/03/2012 - 15:40 | 2314291 Archduke
Archduke's picture

hunh? wtf you on about?   eu-rope.

 

but hey, they have the super-mario brothers.  that should do the trick.

 

Tue, 04/03/2012 - 08:59 | 2312504 spentCartridge
spentCartridge's picture

Does the UK qualify for northern Europe?

Tue, 04/03/2012 - 09:02 | 2312514 LawsofPhysics
LawsofPhysics's picture

yes, some say that the world is still run out of London.

Tue, 04/03/2012 - 09:08 | 2312532 spentCartridge
spentCartridge's picture

Some say that London isn't the UK.

Tue, 04/03/2012 - 09:25 | 2312572 ZeroPower
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Minus the unfortunate chavs one gets to see here once in a while, the City is quite the place. 

Tue, 04/03/2012 - 10:56 | 2312959 dontgoforit
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Like D.C. isn't part of America.

Tue, 04/03/2012 - 12:55 | 2313446 Madrid2020
Madrid2020's picture

That would be Londonistan! Turbin anyone?

Tue, 04/03/2012 - 09:18 | 2312552 reload
reload's picture

Well, if it is, which I doubt - lets hope the current crop of UK politicians has NOTHING to do with it. They are beyond useless. Who do they take their orders from? looks like global corporate interests and Uncle Sam (CIA, White house, Joint Chiefs etc) to me. Most of the seriously old monied banking families who made their first score with slavery and opium are now too inbred and dissolute to matter. That said the Rothschilds are sharp as ever, with the younger ones (especialy Nathan) leading the family toward the control of Commodity production as well as printing presses. But I dont see anybody really being `in control` as we stagger from one fuck up to the next. Its just a game of `not on my watch` which will continue untill the masses get their heads out of the sand.  

Tue, 04/03/2012 - 10:03 | 2312730 Vince Clortho
Vince Clortho's picture

Do you really have a good enough perch to see the inner workings of the Rothschilds and the rest of the CB Elite families?

Tue, 04/03/2012 - 09:31 | 2312590 kaiten
kaiten's picture

Do they say it before or after they took their pills?

Tue, 04/03/2012 - 09:59 | 2312700 BidnessMan
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The Icelanders and Norwegians certainly are out. Not joining the EU is looking better every day.

Tue, 04/03/2012 - 11:48 | 2313183 Ghordius
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the article is about the eurozone, not the EU. different club. Iceland is, as far as I know, still applying for some bigger currency, either the CAD or the EUR.

Tue, 04/03/2012 - 12:55 | 2313455 Madrid2020
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Not really sure it qualifies as European.

Tue, 04/03/2012 - 09:01 | 2312509 q99x2
q99x2's picture

Hear that Germany. Time to make an SS run and round up your banksters.

Tue, 04/03/2012 - 09:02 | 2312511 LawsofPhysics
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What kind of military do the folks in the north have again?  I see a similar North/South rift developing in the U.S. as well.  Most of the U.S. military forces come from the south and california, could get interesting.

Tue, 04/03/2012 - 10:19 | 2312799 Vampyroteuthis ...
Vampyroteuthis infernalis's picture

Law, I tend to see more of an East-West rift. The east coast has very little in common with everything located west of the Mississippi river.

Tue, 04/03/2012 - 10:41 | 2312881 LawsofPhysics
LawsofPhysics's picture

Maybe it is more of a rural versus city folk thing because I travel quite a bit and the "go-getters" in all the major cities are the same.  Moreover, all these cities (in california and new york alike) have their heads so far up the Fed's ass and have huge budget shortfalls they see no options but to believe the recovery is real.

But you may be more right than you know.  Many mid-western and western farmers are getting together (after being burnt by MF Global) and blowback is a bitch.  What's that New York?  You want to feed those people?  Pay up bitchez.  Same kind of shit that got WWI started.

Fri, 06/15/2012 - 08:12 | 2528730 twotraps
twotraps's picture

Excellent point, everyone is broke.   I've been saying that politicians at all levels have more PR problem than anything......they KNOW there are no real consequences to their economic  actions, but it would be really bad if everyone found out that its a Giant Pretend Account that doesnt really matter.

Sat, 04/07/2012 - 23:51 | 2325530 wee-weed up
wee-weed up's picture

East-West rift? Ha! You've obviously never lived in the South.

Tue, 04/03/2012 - 11:46 | 2313109 Ghordius
Ghordius's picture

in europe? separate (small) armies - separate (small) navies

and of course many, many, many US Army, Air Force and Navy bases

Tue, 04/03/2012 - 09:02 | 2312513 Irish66
Irish66's picture

Good read

Tue, 04/03/2012 - 09:36 | 2312516 Mercury
Mercury's picture

The workers of the north can never understand that they really only have 50 percent or less of their real current wealth.

"He who defects first, defects best" is true at the individual level too...

Not that your average European is in a position to withdraw his/her pension up-front and convert it to hard assets but one must do what one can...

But I think that the larger game will get ugly to the extent that Northerners demand (and receive)  hard asset collateral in return for Southern "bailout" funds.  Is this not already the case with Greek sovereign gold?

What the north cannot have is immediate losses in voter wealth followed by a surge in competitiveness from the south.

If only the PIIGS could figure this out.  What better way to fire national pride and stick it to their EU bankster overlords (without bloodshed) than to defect from the Euro, devalue and rebuild their economies starting with the business magnet of cheap labor and favorable tax treatment?

The unavoidable austerity medicine will go down easier when it is accompanied by hard work beneath a strategic banner of “we will crush them in the end” instead of “we must pay for our sins”.

 

Tue, 04/03/2012 - 09:48 | 2312645 duo
duo's picture

The workers of the US can never understand that they really only have 50 percent or less of their real current wealth.

 

The wealth existed to provide a small stipend to the retired in the US, either through pensions or SS back in, say, 1960.  Inflation has already sapped that 50% and more.  The wealth was pissed away in Vietnam, Iraq, Afghanistan and the creation of the "Great Society".

Tue, 04/03/2012 - 10:03 | 2312729 Non Passaran
Non Passaran's picture

I don't think that the average European can withdraw their pension money.
You can just transfer it between different "approved" ponzi schemas.

Tue, 04/03/2012 - 11:51 | 2313189 Ghordius
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"The workers of the US can never understand that they really only have 50 percent or less of their real current wealth."

AND, following this logic:

"The workers of the US can never understand that they really only have 50 percent or less of their real current debt."

Can't have the one without the other, can you?

Tue, 04/03/2012 - 09:03 | 2312517 GMadScientist
GMadScientist's picture

"Inflation will rebalance..."

Lunacy.

Tue, 04/03/2012 - 09:03 | 2312519 swissaustrian
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We in Switzerland are sitting in the middle of all this chaos and can observe how the awakening people of the Eurozone nations or immigrating to our country, because they're trying to escape. This is actually great for us - contrary to what the Swiss right wing xenophobics may say.

Most immigrants - especially those from Northern Europe - are well educatedand hard working people. The young people amoung them do the jobs that we Swiss don't want to do any longer. 

The downside is the domestic real estate market: Population growth, low taxes, ZIRP by the SNB and unhealthy mortgage agreements are heavily inflating prices. This is a massive bubble. 

Tue, 04/03/2012 - 09:46 | 2312640 Sandmann
Sandmann's picture

Wait until the Bundesfinanzpolizei start taking Swiss Bankers like Josef Ackermann hostage - Deutsche Steuerfahnder sind die Kreuzritter der Wohlfahrtsspielbank

Tue, 04/03/2012 - 12:06 | 2313145 Ghordius
Ghordius's picture

Amen - the way they are treating Switzerland again is disgraceful. The way the German SPD is talking about the deal they are cutting leaves me speechless. And they absolutely don't want to admit any criminal wrongdoing by those "Steuerfahnder" that were implicated in the data scandal.

It's a 60'000 leeches strong state inside the state, hellbent in making the German Taxes the 2nd most complicated and absurd collection of laws and decrees of the world... An army of red parasites.

Though in the case of Jo I'd say the Swiss should say "keep him"...

Tue, 04/03/2012 - 19:34 | 2314260 Archduke
Archduke's picture

the money laundering offshore tax haven secrecy jurisdiction swiss deserve it.

but really, all this is preparatory work to set up complete fiscal integration in

the eurozone.  it's inevitable.  get used to the program.

Tue, 04/03/2012 - 09:04 | 2312522 Freegolder
Freegolder's picture

'the ugly truth will escape but the North's large-scale vendor-financing scheme with the periphery will have to continue - even in the knoweldge that the debt will never get paid back.'

 

Nope, I think that's wrong.

You think in short timescales, try to think a little longer term. The Eurosystem is just biding its time.

Once the dollar has collapsed in a few years, and gold is valued at physical-only prices (c.£55,000 in today's terms) then the European debts will be settled in full, as indeed will many others around the world. Debtor countries will give up some of their gold stash to creditor countries.

It won't happen now of course, as gold's true value is hidden by layers of paper.

Tue, 04/03/2012 - 10:57 | 2312961 FeralSerf
FeralSerf's picture

£55,000 gold would be the realization of the truth that the pound and the euro aren't worth what most people think it is and ditto for other assets that are valued comparably.  Gold is not really worth more, the money, the pensions, the  debt and the other assets that are valued in that money are worth much less than currently advertised.

£55,000 might be a bit on high side at the present time though.  I think valuations lie more likely are around 75% lower, or in other words, about $7,000 gold.  There will be further decreases in valuations due to the destruction of available capital from military adventures and wealth transfer schemes though, which could get to £55,000 eventually.  It's a moving target.

Fri, 06/15/2012 - 08:16 | 2528738 twotraps
twotraps's picture

Great reminder, I mention that to people and they cannot get it.  I ask them to think about Italy years ago when it took 1200 Lira to get a fucking coffee.  Is coffee really expensive or does it just take more and more and even more worthless shit to pay for it??

Tue, 04/03/2012 - 11:41 | 2313160 Ghordius
Ghordius's picture

shhhhht.... freegolder, quiet! be a chap, bash the EUR a bit, too! otherwise more LTRO and other shenigans are needed! ;-)

Tue, 04/03/2012 - 09:07 | 2312528 q99x2
q99x2's picture

'The north has executed aclassic vendor finance structure, with no chance the financing will ever be paid back'

 

I'm taking my pell grant car shopping today.


Tue, 04/03/2012 - 09:07 | 2312529 CheapBastard
CheapBastard's picture

It's alot of work to shift that much money from people who actually work and produce to bankers vaults.....lots of talking, meetings, 7 course dinners in Brussels, hookers, sleepless nghts....it ain't easy.

Tue, 04/03/2012 - 11:02 | 2312985 FeralSerf
FeralSerf's picture

Seven course dinners in Brussels are not that unpleasant especially with the right wine to wash them down.  I would volunteer for that.  The meetings and sleepless nights are another matter.

Tue, 04/03/2012 - 09:08 | 2312534 the 300000000th...
the 300000000th percent's picture

I say fuck you Bilderberg group

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