Humpty Van Rompuy Has Fallen Off The Wall

From Mark Grant, author of Out of the Box

Europe, A Victim Of Its Own Folly

“Do you wrestle with dreams? Do you contend with shadows? Do you move in a kind of sleep? Time has slipped away. Your life is stolen. You tarried with trifles, Victim of your folly.”


                       -Frank Herbert, Dune

You may have noticed, I have certainly noticed, that Europe is living in a kind of dream world where they propose various schemes and hope that you see them as some kind of solution for their problems and so; go back to sleep. This worked initially and they keep hoping it will work again but the Sleeper has awakened and is paying attention which is why the “Headline Rallies” have become so short in duration. Many of the schemes now are coming from the troubled countries or the ones that may be troubled shortly, to quote the famous song in Casablanca, “As Time Goes By.” I think it has gotten to the point that they believe their own rhetoric. They spewed it for the masses and they spewed it for the world’s investors and it has been repeated so often that they now rely upon their own fantasy as truth. The Europeans have become the victim of their own folly.

If you stand back and place all of the current schemes upon a small knoll and observe them carefully you will notice one thing; each is tied with a red ribbon trying to get Germany, the Netherlands, Austria and Finland et al to pick up the tab for everyone else. The Spanish pleas for ECB intervention, some Grand Duke to supervise, control and pay for the banks, Eurobonds, bailout funds; they all have the same purpose which is a plea for money from those that have it to be transferred to those that do not have it waved under the banner of a United Europe where each nation is responsible for every other nation and where each country eventually settles to the same cost of funding and standard of living as all of the countries; at the mean. This is the theme that wafts in the wind and it is just various color bearers that wave the flag.  The Germans and the rest of the monied countries have taken two tacts in response to all of this. First they say that “maybe, somewhere out in the future, when the time is right” and so forth to placate those asking for the averaging of Europe which will accrue to their benefit and then, when pressed, they just say, “No” which ends the conversation as nothing can be done without the acquiescence of those still holding their own bags of gold. The politics is not complicated. Germany, for their part, wants to keep the other European nations placated so they will keep buying their goods and services but this part of the equation is also getting problematical. The poorer nations beg, the richer ones hand out some charity but refuse to pour out their purses upon the ground and very little gets done or will get done because the two camps are at cross purposes that cannot, and will not in my opinion, ever get resolved.

If cousin Jake got in financial trouble and his business verged on bankruptcy and he was forced to move to a walk-up tenement in Brooklyn and he pleaded for help I am sure that you would respond. You would “do what you could” you would say which would be to provide him some money. You might even wander over to his business and look at his books and set down guidelines for the receipt of your money so that it would not be squandered. You would not, however, endanger your own way of life and give him so much money that you were forced to move from your very pleasant house in Westchester and give up your Bentley to help your cousin who had brought this all upon himself. This would not be happening and it will not be happening in Europe and all of the schemes and plans and artifices devised by those in need will not get Germany and the rest to live in the same fashion as those in Athens, Dublin, Lisbon and Madrid. When you see the next, new, new fanciful plan floating around in the wind don’t be alarmed and don’t be taken in by the pretty colors. Unless Germany agrees to something it will not be happening and Germany will not, cannot without severe political consequences, agree to the demands of their needy neighbors.

Heading South

All of Europe is gripped by a recession except for Germany. Germany will soon be included as the demand for their goods and services dries up due to the financial conditions on the Continent. There is no decoupling in the world and there has not been in decades as the economy for all of the world is now global. So the United States will also head into a recession which will be caused by the troubles in Greece, Portugal, Ireland and Spain just as the recession in 2008/2009 was caused by the idiocy of free money and no documentation mortgages that took place in America. Europe will soon be returning the favor. That is my opinion. It will not be Armageddon or some 1930’s type of travesty but it will be unpleasant and serious especially as Europe wants to concentrate on liquidity and firewalls and all manner of schemes that do not address the real problems of the countries that are deeply troubled. The solutions proposed do not confront the core issues and, until they do, the situation will only worsen with Spain and Italy joining Casey at the bat.

It’s What You Count That Matters

Allow me to comment on one final issue this morning. When calculating the debt to GDP ratios of the countries in Europe I include their derivatives, regional guaranteed debt, bank guaranteed debt, corporate guaranteed debt and other obligations assumed by the nation. It is not Mark Grant’s opinion or viewpoint rather it is just that I count everything while Europe does not. However the difference is only academic when things go rolling merrily along. When economies head into a recession the differentiation matters.

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.