"The Disease Is Incurable"

From Mark Grant, author of Out of the Box

The Disease Is Incurable

“I can get no remedy against this consumption of the purse:
Borrowing only lingers and lingers it out,
But the disease is incurable”


                 -William Shakespeare, Henry IV                           

We have left the “can kicking” stage in Europe. It is now behind us and we have entered a whole new paradigm while no one was looking or paying attention. In fact I believe we have entered the final stage of this multi-act play where Europe is running out of money!

One of the reasons that Europe is so difficult to assess is the tremendous amount of jargon and hype that comes pouring out from all across the Continent. Each separate nation sends out stuff and then Brussels sends out their fluff and then the ECB makes proclamations and there is no harmonization as each group has its own distinct platform. We are bombarded daily with national interests, Federal interests and finally an ECB that supposedly is beholden to no one but is, in fact, beholden to everyone and especially Germany as the paymaster. Almost every day there is a new bandwagon to jump on and a new disappointment to be found some days later as one plan after another does not come to fruition. So to make sense of it all you have to stop, come to a full halt and give due consideration to the totality of what is happening in Europe.

There are several legitimate ways to add up the numbers but basically Europe is in a recession and the combined economies are shrinking so that growth is not a methodology for success. At the same time the ECB has loosened and then loosened again and again the collateral requirements so that it must be said that the ECB, in its own admission, is becoming a riskier proposition. We are given very little data but I think it is safe to assume that the ECB now holds a very large amount of questionable if not worthless securitizations including all kinds of loans and mortgage obligations that are no longer paying that have been placed with them by the Spanish, Portuguese, Greek and Italian banks. They are also holding sovereign debt in large amounts of all of the troubled nations in Europe and just the default of Greece alone will wipe out all of their equity capital so I believe it is quite rational to state that the ECB is in trouble.

Next let us consider what has happened during the last two years. Every place you look Europe has tried to solve their problems by adding more and more debt. This is true in the bank sector and it is true in the sovereign sector and the debts are piling up faster than Europe can pay for them which is not just a matter of the return that must be paid to finance them but the aggregate amount of new debt that has been added. Leaving aside contingent liabilities totally and just including Target2 funding, the Stabilization Funds’ loans and the debt at the ECB Greece has $461 billion of obligations that cannot be met. By the end of this year Italy will have added an additional $141 billion worth of new debt which is about 7.05% of their GDP. Spain is about to take on $125 billion in new loans which is approximately 9.3% of their GDP and Europe is verging, in my opinion, on an inability to pay their obligations. One country after another in Europe is rolling over and Germany, France, the Netherlands and a few other smaller nations only have so much capital to go around. I assert, in fact, that Germany given its sovereign debt, its funding of Target2, which continues to expand, and its obligations to the EU, the ECB and the Stabilization Funds is already in an over extended position that is careening out of control for this $3.5 trillion dollar economy. If Germany is the safest of what is available in Europe then not only is there not a clean shirt in the house but there is not one that is not ripped and torn.

As a distinction I point to the United States with a $14.3 trillion economy that is 125% larger than its major banks. The country, during the American financial crisis, was able to bail-out the financial system. In the case of Europe the bedrock is France and Germany with a combined economy of $6.3 trillion that is trying to support a $15.3 trillion European Union and where the banks are three times the size of the sovereign nations. The flight trajectory is not sustainable in my opinion as more and more debt is added at the national and Federal level so that while recognition has not fully come to the bond markets it will and then increased difficulties will mount and eventually topple the current structure in some yet unknown fashion. The underpinnings cannot support the weight and one day, someplace, the construct will crack because it must.

Just stop and look at the numbers. Put your prejudices and your hopes and prayers aside and stare at them. Place whatever desires you have to one side of the desk and take a very, very hard look at the data; all of it. Then reach a conclusion on the sustainability of the European Union and I do not believe that your answer will be so different than mine.

My journey examining Europe began with Greece which seems wholly appropriate given its historical precedence. It started simply enough with the addition of their real assets and their real liabilities. It ended simply enough with the realization that the numbers did not add up. There was no prejudice then and there is none now. The numbers just don’t work; not for Greece and not for Europe and so a moment of disembarkation is coming because it has too and it is as simple as that.

“There is a history in all men's lives,
Figuring the nature of the times deceased,
The which observed, a man may prophesy,
With a near aim, of the main chance of things…
We have heard the chimes at Midnight.”


                -William Shakespeare, Henry IV


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