Submitted by Mark Grant, author of Out Of The Box
State Guarantees
“Countries were additionally asked about the amount of state guarantees. These do not form part of government debt, but are a contingent liability.”
-Eurostat
On No Account
I am asked so often about this that I wanted to print out the exact wording from the European Statistics office. In fact, no contingent liabilities are calculated in any government’s debt to GDP ratio in Europe nor are their liabilities (ownership) at the European Union or the European Central Bank. They not only do not include any of these numbers but state guaranteed bonds and bank guaranteed bonds and derivatives contracts also are not part of any debt to GDP ratios in Europe. Right, wrong or indifferent; this is the way Europe does its calculations.
The numbers speak for themselves. The contingent assets are trumpeted from the plains of Heaven. The contingent liabilities are lame mutes living in the “sounds of silence.” The proffered songs could not be more distinct.
“There are two kinds of truths: those of reasoning and those of facts. The truths of reasoning are necessary and their opposite is impossible; the truths of fact are contingent and their opposites are possible.”
-Gottfried Leibniz
The Counting House
This paradigm for liabilities then is in stark contrast with contingent assets. Here Europe not only counts sovereign guarantees but flouts them in the Press as is the case with the IMF firewall or the European Stabilization Funds. In each case there is very little actual paid in capital but a tremendous amount of promised capital if needed. So the methodology is to count contingent assets and not to count contingent liabilities and, hence, we have arrived at a position of inaccurate numbers, deceptive information and decisions made based upon falsifications by omission. In my view there is no rational justification for using the two opposing schemes at the same time except to distort the data for Europe’s own benefit and to mislead investors, suppliers and perhaps the non-domiciled international banks.
“They're out there...One Flew Over the Cuckoo's Nest”
-Ken Kesey
Belgium
Nowhere is the danger greater than in Belgium at present. They paid $7.13 billion for their share of Dexia and took on, at the time, another $71.9 billion in contingent liabilities. Since then they have provided sovereign guarantees for BNP Paribas in Belgium and for Fortis Banque which has taken Belgium to $182.2 billion in sovereign guaranteed bank debt. In addition they have provided $20.7 billion in capital and $11.4 billion in loans to the financial sector. Taken all together this totals $213.8 billion which is nowhere to be found in their debt to GDP ratio. Just these liabilities alone are then equivalent to 41% of Belgium’s GDP. On 4/20/12 the central Bank of Belgium admitted the economy was in contraction and that the current “official” debt to GDP ratio was 98.2%. This then takes financial sector contingent liabilities and the “official” debt to GDP ratio to an astounding 139.2% but the story does not end there. Belgium is accountable for $132.8 billion of the ECB’s balance sheet, $50 billion for the Stabilization Funds, $36 billion for the Macro Financial Assistance Fund, $26.8 billion of the European Investment Bank’s balance sheet which adds another $245.6 billion to Belgium’s liabilities. Consequently Belgium’s European liabilities are an additional 64% of their GDP. Then the gross total is:
Belgium’s Actual Debt to GDP Ratio 203.2%
Now guarantees and promises and contingent liabilities are funny things. You can pretend that they aren’t there but then they show up and demand payment. You may recall the monoline bond insurers who were just fine with their guarantees of American municipal debt and then they expanded their coverage to mortgage obligations and the result of that decision is now written in the pages of history.
The IMF
It is nice that they now have $430 billion in contingent assets pledged for Europe. You may wonder, since every politician on the Continent says that things are so much better, why this weekend they were holding the G-20 charity event. If things were actually better one would speculate that a request for alms would not be needed. If everything is so great at home; they would not need to come begging from other nations. I believe there is a clue here, a real indication of the problems and a real sign of the severity of the issues.
It is all fine and dandy that pledges have been made and that the back-slapping ensued. The reality is, however, that this does not change one blessed fiscal problem in Greece, Portugal, Ireland, Spain, Italy or Belgium. Nothing changed; nothing was minimized so that when the financial obligations overcome the available capital the result will be just the same. The real debt to GDP numbers for these countries will drive the results regardless of the funny numbers offered by Europe. There is NO opinion in the data for the liabilities that I have presented; it is Europe’s own numbers. I just counted what they did not wish to count.
When will the bough break?
I am asked this all of the time, each conference that I speak at, each television segment on Europe and at each discussion with various money managers concerning the problems on the Continent. I always smile because we have already had three branches snap and they are Greece, Portugal and Ireland. So the actual question is when will the next sprig be shorn and then when will the tree be felled. If we use this tree as the analogy then so far Europe’s responses have been to “water, water, water” and then “prune, prune, prune.” This is liquidity shoved in and austerity meted out. There are only two ways out of the current dilemma and that is growth which is not possible as the European economies contract and fare worse as the result of the austerity measures or Inflation; which Germany can’t stomach. The “at the very bottom of the barrel” answer then is not an economic response at all but a question of politics. The answer is actually when some nation cannot take it anymore; either the funding and the increase in national debt and the resultant credit downgrades or in receiving and the pain inflicted upon the populace. From the funding perspective it will be when the debts of the givers begin to match the debts of the borrowers. From the recipients it will be when the core nations decide that no more money will be given and so they will leave the funding nations and their banks with the debts and return to their own currencies and devalue. Which one comes first can only be answered by Divine Providence but I do not believe the train wreck can be stopped. I do not believe, any longer, that the catastrophe can be avoided and I would begin to immediately plan for an event that will eclipse the American financial crisis of 2007-2009 because this one will be far worse.
The Netherlands
The government has fallen. There will be a new caretaker government until things get straightened out. The government fell due to the austerity measures that have been demanded by the new fiscal pact in Europe. The Netherlands are one of the few “AAA” governments left in Europe and the head of the party that withdrew its support from the current coalition stated, “We don’t want to follow Brussels’ orders. We don’t want to make our retirees bleed for Brussels’ diktats.” That is pretty clear I think; long live the Dutch and to heck with the commands of the European Union. Europe is in a recession and Nationalism is coming to the fore and the real numbers are hitting the core nations in Europe regardless of whether they are recognized by politicians or not.
The Sounds of the Trumpet
The numbers that I have given you for various countries’ debt to GDP ratio are accurate and inclusive. There is nothing magic about them. The data all comes from what the Europeans provide themselves. There is a long slog in finding the numbers and then it is simple addition and one division by their stated GDP. Then since you have the real ratios you can make your own decisions before the contingent liabilities show up. I can assure you after my almost four decades in the Great Game that many of the liabilities will show up especially those connected to banks and other entities that are not under the State’s control. The signs are all around you; France will be ruled by an anti-bank socialist, the Netherlands government has fallen, every nation in Europe is becoming much more Nationalistic, the Continent is in recession, Spain cannot hold because any rational reading of their financial position decries the political nonsense, Greece will get another round of capital or leave the Euro in short order having milked everyone they could for their own benefit, Portugal is a continuing disaster, Ireland is hanging on by the skin of their teeth and this grand experiment that Europe has constructed is about to end. Even if you disagree with my conclusions; you cannot ignore the risk. At the present time the Risk is so over weighted as to the Reward that common sense demands either a prompt exit or some kind of vote against if that is your mandate. There are those in life that get some sort of joy from singing the song of “I told you so” but I am not one of them. Take my advice now and when the hordes of Mordor begin their march we can smile and sigh that we were safely behind the castle walls and not out in the pasture being devoured.
“It is forbidden to kill; therefore all murderers are punished unless they kill in large numbers and to the sound of trumpets. “
-Voltaire