Chinese and U.S. officials have been meeting in Washington for the past two days under the aegis of the annual forum of Strategic and Economic Dialogue (SED). All the news releases from these meetings sound so hopeful about increased cooperation between the world powers. The Chinese feed the U.S. policy makers with words of promise about the SINO economy becoming more market-oriented and the American delegation tells the Chinese that they will be fiscally responsible and do all they gain to maintain the value of U.S. paper assets that fill the vaults in Beijing. An hour after the Chinese head home, the financial media will no doubt be hungry for some more morsels of hope. So it goes and it will continue: Both sides pledging fidelity the vibrancy of the global economic order.
Geithner was trumpeting the news that the Chinese promised to level the playing field for U.S. investors in China. The only problem is we don’t know WEN. The U.S. and China will always see differently as they operate on different timelines. The U.S. is worried about quarterly profits and four-year presidential cycles. The Chinese have a far different time frame and will let events unfold in a much longer period. (THE FAMOUS LINE BY CHOU EN LAI TO HENRY KISSINGER WHEN MR. CHOU WAS QUIZZED ON HIS VIEWS ABOUT THE FRENCH REVOLUTION AND RESPONDED: “IT’S TOO EARLY TO TELL.”) There lies a great chasm between promises and deeds.
The news keeps pouring out of Europe and the only thing we know for sure is that everything that emanates from Brussels is a LIE. The Eurocrats spend their time denying “rumors” that turn out to be true and “truths” that turn out be rumors. There is an emergency meeting; there is no meeting. The Greeks are leaving the EURO. No, the Greeks are not leaving. There is a crisis; there is no crisis.
The bottom line is that when so many policy makers have been so disingenuous for so long, nobody has any idea of the FACTS. One thing that we can be certain of is that before any of the PIIGS depart from the EURO a massive audit will have had to be done to measure the costs of staying in versus the costs of leaving the EURO. The costs to be measured are not the costs to the GREEKS or the other “profligates” but rather to the healthy center.
How big of loss will the German, French, Austrian and other Northern-Tier banks have to absorb and what will it cost the populace in a bailout of the domestic banking sector? Is it cheaper for Germany to keep transferring funds to the DEBT-STRESSED NATIONS or to just bailout the German banks?There were two must-read articles in the papers that covered the issue very well. The first was in the New York Times and juxtaposed Greece with Argentina. It is a thought-provoking piece by a long-time friend, Mark Weisbrot, and is a good perspective on the needs of a democratic political entity versus the creditors who lent money in the hopes of “moral hazard.”
The second piece was in yesterday’s WSJ and was written by Timo Soini, the leader of the TRUE FINN PARTY that was just well received in the recent Finnish elections. Mr. Soini lays out his view about who is actually getting bailed out in the EU and who is footing the bill. It is important to develop a perspective on the European crisis for it will be moving the markets as we jump from LIE to LIE. The problem we will have to analyze is what will be the impact on the financial markets if there is a full-blown BANKING CRISIS in EUROPE. The EU economy as a whole is larger than the U.S. and its banks play a much larger role in capital formation than the banks in the U.S. Corporate debt markets are not as deep in EUROPE, therefore, the large banks are much useful in generating loans.
As I alluded to in yesterday’s NOTES, the U.S. LONG-TERM DEBT MARKET MAY BE BID BECAUSE OF FEARS ABOUT EUROPEAN SOLVENCY. The question that will stay with us is whether or not we could have a LEHMAN 2 that is conceived and nurtured in EUROPE. If we go from a liquidity problem to a SOLVENCY PROBLEM, this summer will not be in the doldrums. As an update, the GREEK 2/10 spread is still about 850 basis points, inverted. Ireland is 89 basis points, inverted. Portugal is 76 basis points, inverted. I will keep a watch on the Spanish and Italian spreads to monitor any new stresses.
It is important to remember that if Greece were to leave the EURO, then Ireland and Portugal would be forced by that action to leave. If the GREEK currency was to be devalued against the existing EURO, the others would be forced to abandon the CURRENCY as their competitive situation for trade reasons would be very difficult. A devalued DRACHMA would be a competitive nightmare for Portugal and that is an important reason for the maintenance of the status quo.
A quick aside: The Brazilians have announced they are unhappy importing ETHANOL from the U.S. and therefore are going to ramp up its own SUGAR-based ETHANOL production to stem the import of U.S. CORN-based. The use of subsidies has badly perverted the ETHANOL and GRAIN markets but it is important to see if SUGAR, which has performed so badly this year–down 30%–finds a bid as the Brazilians ramp up their ETHANOL production. Just something to watch.