Portugal

Phoenix Capital Research's picture

Months ago, I forecast that Germany will walk before it goes “all in” on the EU to prop up everyone else. I believe that day is fast approaching. Unless Angela Merkel wants to commit political suicide, she will be forced to protect Germany’s domestic issues. Whether this comes as a result of Germany pre-emptively leaving the Euro or doing so after one of the PIIGS has already left remains to be seen. But in the end, Germany WILL WALK IF IT HAS TO.

Europe's Three Ring Circus

First and foremost; nothing is happening in the European Union without the agreement of Germany. They have the gold and they will make the rules regardless of the words bandied about proclaiming brotherly love and the solidarity of the European nations. This is all drivel, just politics and a subject that can be ignored as you concentrate on what is really important. When Germany speaks, on a scale of 1-10 with 10 being the most important; Germany is a 10 and the only 10 on the Continent.

Guest Post: Abandoning Ship - The Eurozone Is Failing At An Accelerating Rate

Despite what her officials say publicly, austerity has limited support within the ECB itself, because it is run at the top by neoclassical economists. Instead, the real constraint is Germany, whose citizens’ savings are on the line and which faces the prospect of its third currency collapse in a century. So this is where the lines are drawn up: spendthrifts desperate for more money, a conflicted central bank, and Germany. Angela Merkel has made considerable progress in pushing the German electorate in a direction that is completely against its instincts by playing the political card marked “there is no alternative.” With her considerable political skills, she may be able to push her people some more, but it is becoming increasingly difficult, because everyone in Germany can see that committing real savings to bailing out the spendthrifts only wipes out the savings. These are not euros simply conjured out of thin air, because the Bundesbank cannot print them and probably wouldn’t do so anyway. But the pressure is mounting on her, and she is being squeezed by governments such as the British and the Americans, who are now panicking over the consequences of failure. This is why both countries went public last week, with David Cameron even visiting Merkel in person. It is a sure indication that major governments outside the Eurozone are beginning to expect the worst, and that unless Germany gives way, it will happen quickly.

Europe's New, New Math

The focus of the markets these days is driven by the headlines that are pumped out by the European Union. Hope is promised, the next big summit to fix all issues is touted, Germany is going to come around any day is offered up as Ms. Merkel denies any such thing and “muddling through” holds up prices as the by-word of belief  as the blinders of the great propaganda machine direct everyone’s attention away from what is most important. As one example of this is some firewall, no matter what size, that does not do one thing to address the core issues of Italy and Spain which both have too much debt and too many other liabilities in a time of recession where contingent liabilities become outright liabilities and hidden in a vast variety of ways. These firewalls accomplish nothing except to dissuade investors from being involved and their capitalization weakens the finances of the countries providing the capital, whether counted or not, and ends up weakening the balance sheets of the core countries of Europe as we roll from promises and guarantees to moments when real money must be put up. If you stand far enough back you can visualize what is going on; “look at our firewall and do not pay attention to the countries which are having severe economic declines” and so the head fake continues until it cannot any longer as the bills overcome the ability of a nation to pay them.

And For Today's Market Ramp Rumor Du Jour We Have...

It has been a while since the Guardian came up with a European "bailout" rumor. Time to change that. In a nutshell: Germany will somehow allow a fund, the ESM, which does not yet even exist, overturn the primary principle of the Eurozone, the no sovereign bailout clause, and use money which has not been funded, to subordinate bondholders across the entire continent (because ESM is priming) and serve as an additional secured lender in addition to the ECB... In other words, the ESM will take place of the ECB's SMP. With the only difference that the ECB can print money, while the unfunded ESM will at best rely on the murky details of repo lending. Same subordination either way, of course.

Humpty Van Rompuy Has Fallen Off The Wall

Europe also allows for sovereign debt to be counted as risk-free assets and not marked-to-market. Many nations, Spain is one example, allow for Real Estate loans, mortgages and even commercial loans to be carried at face value as a matter of financial engineering. I think it is a bad joke but the bite has come. This occurs when the loans no longer pay and the revenues are no longer present no matter how you carry them on your books. Then, if the banks try to off-load the properties they have assumed they take losses which are real losses and have to be accounted for on the books or they are securitized and placed as collateral at the ECB which then hides the problem for a while but not indefinitely and the “indefinite” has run out of time which is why any number of banks are calling “Uncle” and why the sovereign nation nations are crying “Uncle” and trying to deflect their problems first back to the ECB and then to find some new scheme so that the country does not fall victim to the Men in Black. All fine, all dandy, but, once again, the central issues are not dealt with and all of the schemes like all of the King’s men and horses cannot put Humpty back together again.

Humpty has fallen off the wall.

Guest Post: The Welfare Kings Of Europe

In spite of the fact that 85% of Greeks want to stay in the Eurozone, I was reasonably confident that Greeks would support Syriza to a first-place finish, and elect a new government willing to play chicken with the Germans. However Greeks — predominantly the elderly — rejected change (and possible imminent Drachmatization) in favour of the fundamentally broken status quo. But although Syriza finished second, the anti-bailout parties still commanded a majority of the votes.  And New Democracy may still face a lot of trouble building a coalition to try to keep Greece in the bailout, and in the Euro . There has long been a rumour that Tsipras wanted to lose, so as to (rightly) blame the coming crush on the status quo parties. What fewer of us counted on was that the status quo parties wouldn’t want to win the election either. The pro-bailout socialists Pasok have thrown a monkey wrench into coalition-building by claiming they won’t take part in any coalition that doesn’t also include Syriza. This seems rational; when the tsunami hits, all parties in government will surely take a lot of long-term political damage. Pasok have already been marginalised by the younger and fierier Syriza, and Pasok presiding over an economic collapse (for that is undoubtedly what Greece now faces) would surely have driven Pasok into an abyss. The economy is such a poisoned chalice that parties seem willing to fight to keep themselves out of power.

What Is Next For Greece?

One European think tank which has been spot on in its skepticism over the past two years, is OpenEurope. Below they share their views on the next steps for Greece.

Troika Considering Changing Irish Bailout Terms, RTE Says

The Spanish precedent is indeed spreading, and as noted here previously a week ago, the Irish demand to get equitable treatment may be about to be granted:

  • TROIKA CONSIDERS CHANGING IRISH BAILOUT TERMS, RTE SAYS

However:

  • BROADCASTER RTE DOESN'T CITE SOURCES FOR BAILOUT REPORT

So most likely just a trial balloon to see the European response. But why not? What is the downside: Europe blinked and now it is up to the peripherals to demand the same. Next up: Portugal, Greece (again), and again... Spain. And so on, until the socialist utopia finally does run out of other people's money.

Phoenix Capital Research's picture

 

While everyone else is focusing on the Greek elections, the REAL issues pertaining to the EU (namely where the funding for Spain’s bailout as well as future bailouts will come from) continues to be ignored. Indeed, no one seems to be asking THE key question regarding the EU: Just WHERE is the money for this bailout going to come from?

 

Monday Will Not Be The End Of The World, Sorry

Perhaps all of this has gone on for so long, or perhaps because we keep hearing the cries of “Wolf” each week for the last several years, that the markets are impervious to any new cries for help. An odd kind of complacency seems to have set in where nothing matters too much and everything will just be fine. Yesterday’s equity market rally based upon the central banks providing liquidity is just what any serious observer would expect and yet the stock markets rallied as if this was something out of the ordinary which clearly demonstrates either the market’s lack of understanding of real world events or it represents the hype of some hedge fund that was tossed around in the media like it was a new product at Apple. In any event, don’t wake up on Monday morning and think that Greece will have left the Eurozone and returned to the Drachma. That is not how things will play out. In the final analysis it probably all comes down to what price the Germans are willing to pay for dominating Europe.

The European Scorecard: 2 Out Of 5

There are five problems that need to be resolved within the European crisis and Credit Suisse provides a scorecard for the progress towards these 'risk factors'. The key issues are: growth, peripheral current account balances, solvency of the insolvent, ring-fencing the insolvent, and mutualization of government debt; but what is more worrisome is that while they have raised the average score to 2.0 out of 5 (from 0.6 out of 5 in Nov' 2011), it has not budged now in four months. The lack of growth, fiscal tightening, continuing insolvency concerns and excess leverage in the private sector, and de minimus deleveraging in Spain, Greece, Portugal, and Ireland leaves the vicious circle of progress on the European scorecard much harder from here.

Guest Post: Compassion – Killer Of Society?

Greece, Spain, Portugal, Italy and others besides have fallen into the trap of bribing their electorates with promises that become ever more unsustainable. In each of these states, expectations have been created that cannot be met and that cannot now be undone. This is surely a recipe for social unrest. These will not be the only countries to succumb to failure. The national debt, the unaffordable long-term cost of social security, health care and a myriad other entitlements and the mounting evidence of the insolvent state point to the same outcome for the UK and the US. Failure is ensured; the more pressing question is, what happens next?