The Most Dangerous Country In Europe

Submitted by Mark Grant, author of Out of the Box,

One of the primary focuses of "Out of the Box" is on where you might get hurt and, more importantly, seriously hurt. "Preservation of Capital," the first ten rules of my thinking, has reached epic seriousness in a world with interest rates at unsustainable lows and underlying economic fundamentals that cannot support today's yields. The irrational game goes on based upon one thing and one thing only which is the creation of capital by all of the world's central banks. The money must go somewhere and so it does but the disconnect between the equity markets and bond yields from the real world is frightening.
"Begot of nothing but vain fantasy."
                   -William Shakespeare
Nowhere on the planet is it scarier than in Europe. Made-up numbers, un-counted liabilities, four years of inaccurate projections from the ECB and the IMF and securitizations parked at the European Central Bank that have all of the credit worthiness of an empanada restaurant in Lisbon. Money flows in, yields go down, the amount of debt increases and few pay any attention to the entire equation which states that what must be paid is the interest rate times the amount of debt as the Draghi bravado overcomes everything. Scant mention these days of the total amount of debt accumulated by the sovereigns as the 3.00% debt limit has become the most elastic of road signs or a trivialized fairy tale by many accounts.
With the banking system in Europe now posting non-performing loans that have reached all-time highs while the recession on the Continent deeps and worsens with the passing of each week I have cast a weathered eye at Europe. Most of us are aware of the dangers in Greece, Cyprus, Portugal and Spain but a careful analysis reveals that these are not the most dangerous of countries. They have problems, they are in dire straits but they do not hold the title of the greatest risk in Europe.
That title, in my opinion, belongs to France.
The Germans ballyhoo and point fingers at Cyprus, Luxembourg, Malta and the like as being financial centers where the banks are much larger than the economy. Yet nowhere in Europe is this issue so pointed as in France. The French banking system is 400% bigger than the economy of France and this is the worst ratio in all of Europe. Please compare this to the American situation where our banks are roughly equivalent (100%) with our economy.
The combined tax rates for wealthier people is not the 75% number that we have seen bandied around but more than 100% for the richest of France. Even the Supreme Court of France has declared this not taxation but confiscation. Mr. Hollande does not want any more austerity but wants to increase social programs, add more sovereign debt, raise their equivalent of social security payments and lower the retirement age. Whatever political niceties that have been bandied about it is clear that Germany and France are in diametric opposition.
Then as France slips further into recession and as their non-performing loans increase and as their massive amount of securitizations rapidly decline in value; their banking system will come under extreme pressure. Much is hidden and cloaked in France but bills that must be paid will begin to take their toll and the uncounted liabilities do not disappear just because no one adds them up correctly. France, in my view, is a powder keg waiting for some fuse to be lit and it will not be a Belle Epoch Ball at Versailles when it does. There will be fireworks aplenty but no cheering crowd to accompany them.
If there is any good news here it may be that Chateau Petrus may once again be affordable.