When is a European debt not a European debt?
European politicians are being completely unfair in their attitude towards the PIIGS, because the money owed by these countries is an accounting problem, which could easily be wiped out with the press of a button.
We have had 2-years of this Bullshit, and all it has done is made things worse.
So let’s get to the nitty-gritty of reality.
Germany is not going to pick up a sack of money, put it on a plane and send it to Greece, Italy, Portugal or Spain. They are simply going to readjust a few numbers in a German Banks computer.
However, if they did have to deliver the physical cash, this also wouldn’t be too difficult.
They would simply go to the ECB and say…”Print more!” It is just that simple. They wouldn’t be going around Germany and taking it out of Herr Mueller’s wallet.
Germany remains blindly opposed to any idea of QE, but the fact is people are confusing debt and obligation with solvency. And as the ECB can create as much solvency as it wishes, we should look at what the real problem is. Fiscal obligation and responsibility!
France and Germany could have let Greece and the other “deviant” members of the EU default a long time ago, but they didn’t, because doing that would not have been good for Germany or France.
The creation of the currency joined all Euro-zone nations at the hip, so All Euro-zone members need to have responsible fiscal policies in place, in order to maintain a level of trust with foreign lenders. However, because certain countries have been lending irresponsibly, we are all going through this current “madness”, just to facilitate the removing of fiscal responsibility away from those who have misused it.
I am not in favour of taking over the fiscal arrangements of sovereign nations, but in the case of the PIIGS, especially the smaller ones, perhaps I need to concede that it is necessary for this to happen.
As I said earlier, Germany does not like the idea of printing more money, but if they are willing to put up 440 billion to provide some “guarantee” to lenders, then it’s their game. However it is still going to produce the same result as QE.
If people have less money to spend and goods stay the same price, or if people have the same amount of money and the price of goods goes higher, the end result is an inflationary scenario.
Germany has decided to squeeze the PIIGS, providing guarantees for future loans, whilst at the same time instructing the Troika to impose Austerity; removing money from their economies and make them suffer heavily for past regressions.
But Germany, along with France, have to be extremely careful with what they are doing, because by getting into the Sovereign debt guarantee business, via the EFSF, they are opening themselves to the risk of debt contagion.
It might have been much better for the ECB to continue to buy Greek Bonds: not to help Greece, but to teach them, (and other deviant nations), a lesson. Doing this would not have forced private investors to take a large “Haircut” and would have kept Greece and co. on the leash as they could not have defaulted.
This would have also provided the ECB with some decent long term profits, whilst these countries sorted their financial problems out themselves.
Sadly, the ECB had the idea that by continuing to buy bonds, they would not be encouraging the PIIGS to act responsibly, and therefore they stopped buying and this almost caused these countries to default.
If the ECB would have continued to buy bonds, they would have maintained a high level of leverage over the PIIGS, and as stated, made a nice profit by doing so.
On a social level, this would also have removed a lot of the “them and us” arguments which have become prevalent across Europe over the past year, which is not good if your aim is a more integrated and unified Europe.
However, when it comes to blame, nothing is quite as unfathomable as calling this a “Banking Crisis”, or the blind intent of people to punishing banks.
At the inception of the Euro, banks were told that all sovereign European bonds were equal, and banks operated on that basis. If they hadn’t, the Euro could have never functioned for as long as it has, because the problems caused by its inherent flaws would have materialised much quicker.
Whilst it was evidently obvious that those southern European economies were never as secure as those of Germany and France – banks were led to believe that all European bonds were of equal value.
But, now this has proven to not be the case – the rules are being changed, and banks are being told to take a loss.
Believe me, when I say that banks are not completely innocent in this mess, but banks work within the set rules, and if the rules are wrong, we must blame those who make them. Moreover, as this is not a “banking” crisis, but one of sovereign insolvency and debt, I do not see how penalising the banks and their shareholders is going to help the situation?
Germany seems to be the only place where people don’t understand this. All they keep saying when QE is mentioned is “Wiemar” ( perhaps next week the Italians will start chanting “Nero”) But when do we start being modern and leave past mistakes in the past
It is this lack of understanding which has caused some recent friction between Germany and France, (plus a few others). But Germany being the economic powerhouse it is – few are strong enough to argue.
I hope this is a “misunderstanding” by Germany, because the alternative would be much more sinister. Some might suggest that there could be intent by Germany to “buy” Europe at rock-bottom prices…Just today, in a speech by Merkel, she said, “We mustn’t take 50-years of peace in Europe for granted!” Whilst this may be a normal “rallying-cry” in the German parliament, the rest of Europe doesn’t need to hear it!
But let’s get back to solving the problem.
Whatever is done over the coming days is not going to “kick-start” growth in Europe.
Once the inevitable “haircuts” are negotiated, we need to see the mechanism for leveraging the Germany money – 440 billion is not enough, we could need as much as 3 or 4 trillion!.
As, even with leverage, the Germany money will prove insufficient to bring back a broad sense of confidence in the global market, The ECB will need to come to the table and help out.
What we will have is a mixture of measures and rules to help improve the solvency across Europe including guarantees against losses for the international bond buyers.
Buyers which are going to include China, something which is more frightening to me than Germany!
However, something will be done, the “can” will be kicked down the road a little further, PIIGS will be squeezed a lot harder, and debt will increase – albeit hopefully at lower interest rates.
Is the solution going to be long lasting?…I really doubt it.
This is a debt and solvency problem, consumption will drop, revenues will decrease, equity values will ease and commodity prices will continue to increase, bringing with it inflation, whether Germany likes it or not.
Taking all these things into consideration, the time and the conditions are still not with us where we can start to plan for the next phase of economic growth, which is what is needed.
…And as it has taken us 2-long years to get where we are today, putting growth on the agenda is for another lifetime!
Good luck and good trading
The Old Man