Euro Crisis Faces Judgment Days Again

Euro Crisis Faces Judgment Days – WSJ.com.

This WSJ headline is missing a word: Again. The Eurocrisis has been moving in slow motion since we discovered that Greece was not forthright with its government finances. We are all sick to death of the seemingly endless repetition of the Eurocrisis news cycle, and I do not see the endgame coming anytime soon.

This article analyzes where the Eurocrisis is heading based on upcoming key events on the calendar. This is an excellent review of those events and what they could mean, but I believe that the article is too alarmist. Europe is not in as bad shape as some people want you to believe; in the short-term, that is. In the long-term, countries will either have to default on their debt or make drastic budget cuts to avoid the default; however, Europe currently finds itself in an equilibrium . While their economies are in recession and their budget situations are becoming more dire by the day, they have the money and some tricks up their sleeve to keep the train on the rails a bit longer.

I couldn’t tell you how long this situation can persist without an adverse event causing a market panic. No one can, but the current situation can persist indefinitely.

In the second paragraph, the writer implies that Spain is getting close to losing access to bond markets. Foreign demand for Spanish bonds has been close to zero for quite some time, but Spanish financial institutions still can keep these domestic bonds on the books at pretty much face value.This quirk of the capital rules assures steady demand for quite some time.

The ECB will give Spanish banks loans against the bonds without a haircut through its liquidity programs. The Spanish banks can (and will) continue buying Spanish bonds, pledging the bonds for cash and using the cash to buy more bonds. All the while, the banks collect the interest from the bonds, which is much higher than the dirt-cheap rate they pay the ECB. I am aware that this scheme will eventually lead to disaster, but not today. The Spanish situation will remain static indefinitely.

In the third paragraph, the article rightly points out that Greece needs more cash. So what? Greece always needs more cash. It has needed more cash since it left the Ottoman Empire in 1821, and the world hasn’t ended. The reason why Greece will not be allowed to default and start the much touted contagion effect is because it is cheap to keep Greece afloat. For €28bn in two easy payments of just €14bn a year, you can keep Greece from defaulting.

This paltry sum is a rounding error in the multitrillion dollar Eurocrisis. The ECB could easily get Greece this sum with the same backdoor bailout that it used in August to keep Greece from defaulting on a €3.2bn bond payment due to the ECB. No one wants to be blamed for a Greek default, so the Eurozone will keep it afloat indefinitely. A Grexit or Greek default will not be the cause of the meltdown.

Another  important event highlighted by the article is the German Constitutional Court ruling on the ESM. If the court says, “Neine,” then the Eurozone loses its paymaster and all of the hope and prayer keeping markets buoyant will dissipate instantly causing  a huge market meltdown in Europe.

This adverse consequence is exactly why the German court will not rule against Germany’s involvement in the ESM. The German court is a group of politicians, and what politicians do is avoid blame and take credit wherever possible. If the German court rules against the ESM creating a market panic, it will lose a great deal of credibility and gain a lot of blame. The Court will rule in favor of German involvement with a minor caveat or two that does not restrict the ability of the German taxpayers to be on the hook for unlimited liability.

On the same day the court decision is due, we have Dutch elections. The anti-Europe parties are drawing support of roughly one-third the Dutch electorate. This figure is significant, but it is no game-changer. Exiting the euro has many consequences. Even if the anti-Europe parties form a governing coalition, it will be years before they are able to make any drastic changes in the Dutch relationship within the EU and Eurozone.

Lastly, the article rightly mentions that the ECB head Draghi will continue to jawbone. For example, the ECB assures us that it is “designing” a bond-buying program. Folks, a bond-buying program is no 787. It does not take a team of people working for years to design; basically, you need one bureaucrat, a pot of coffee, a couple of croissants and a day. It can’t be a Friday, though. Nothing gets done on Friday. This stalling is just jawboning, and it has proven highly effective so far. There is no reason to believe that it will stop working.

The event that starts the Europanic will not be something of which we are aware. These types of risks can be ameliorated. What will happen is that there will be a big surprise, a.k.a. the black swan, that catches everyone off guard and ultimately starts the endgame.

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2 thoughts on “Euro Crisis Faces Judgment Days Again

  1. I’ve read your comment here and on the WSJ and I liked it. It’s actually not very common to find well-balanced articles like this. They usually go to extremes, by both medias and commentators (I guess to attract more readers). But yours is like more well-balanced. Keep it up.

  2. “The Court will rule in favor of German involvement with a minor caveat or two that does not restrict the ability of the German taxpayers to be on the hook for unlimited liability.”

    So far, this has been the trend. It is probably reasonable to expect this trend to continue, too. Yet the “unlimited” facet of bailout is setting up to be a black swan blowing out financial markets.

    Since the swindle of ’08, bailout has been engaged with set limits established. All forms of quantitative easing and central bank asset purchases have been capped, this under the [false] assumption that, time bought would allow for the restoration of confidence in the securitization regime in whose build out during the Greenspan era (King Ponzi) was created a faux economy in which a massive debt trap in fact was laid — a trap whose springing, indeed, anyone with a sense of history could see coming, and anyone with a sense of American history should know well enough was being authored and run out of London, this with both necessary and desired help from junior partners in New York, all for the sake of eventually putting the constitutional republic of the United States in line for its virtual, if not actual, destruction.

    Now, however, central banks are talking of “open ended” purchases of banking system “assets” (a.k.a. insolvent garbage amassed under a zero due diligence regime endless rationalized by King Ponzi himself when he was running the Fed). What is a bond holder with claim to some debtor’s present liability to think of this open ended [hyperinflationary] support of these liabilities? Is he or she to suppose repayment of his or her claim is likely to be in currency maintaining its present purchasing power? Hell no! Open ended bailout is walking through the door into 1923 Wiemar Germany (whose like-effect already can be vividly seen in the euro-zone periphery, desperation and all, this amidst the physical economy’s shutdown). So, the “black swan” you’re looking for is likely to be delivered via so-called “bond vigilantes,” much as has already been witnessed in the euro-zone periphery. Bond markets throughout the trans-Atlantic banking system’s core are all too likely to blow out, and this surely will create a self-perpetuating, negative feedback loop set to bring the same cycle of financial problem non-solution and human desperation seen in the euro-zone periphery to core trans-Atlantic economies in rapid fashion (as well as accompanying theft, both institutionally legitimized, and the commonly known illegal type).

    The other “black swan” contrarily might come from aristocratic elements who quite understand the hyperinflationary dynamic at hand with “open ended” bailout. These are the sort who took to the pages of the Financial Times of London on July 3rd and demanded reinstatement of a Glass-Steagall standard throughout the banking system (which policy necessarily involves massive debt write down on account of the banking system’s reorganization). Might these be inclined (and appropriately well-connected) to see to it that, blood flows in the streets with that literally spilled from those promoting and/or playing into this insane policy of open ended bailout? Time will tell. And not much longer will we have to wait.

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