As regular readers of NOTES are well aware, I have been very critical of market participants like George Soros and their sanguine views of the European DEBT CRISIS. Many analysts like Jim Cramer have spent the last years waving the debt problem away. First, it was Greece was too small to have an impact on Europe. Ireland was too small and besides was ring-fenced by a bad bank structure. Portugal was smaller than Greece, thus nothing to be concerned about. Italy and Spain were possible problems but many were listening to the flirtations of the Chinese, who, time after time, made solicitations about purchasing European Debt. (By the way, we still haven’t seen the Chinese Sovereign Wealth Fund enter the fray.) If all else failed, European financial leaders were too exposed to the EURO to allow the European Monetary Structure to collapse. Germany would not allow the work of Helmut Kohl and others to be just another failed attempt at a unified Europe.
If German citizens question the cost of maintaining the EURO, then Chancellor Merkel would just have to impose her WILL on the BUNDESTAG and insure that the good BURHGERS would be willing to underwrite the debt of the GIIPS. The analysts have positioned themselves like the old joke from when I was in graduate school: A PHYSICIST, CHEMIST AND SOCIAL SCIENTIST ARE ON A DESERTED ISLAND AND NEED TO OPEN A CAN OF FOOD. THE PHYSICIST WANTS TO SMASH THE CAN WITH A ROCK. THE CHEMIST TO HEAT THE CAN,WHILE THE SOCIAL SCIENTIST SAYS TO ASSUME THEY HAVE A CAN OPENER.
Like the CAN OPENER, many analysts and traders ASSUME THAT GERMANY AND OTHERS HAVE THE POLITICAL WILL TO SUSTAIN AN ECONOMIC BAILOUT OF EUROPE. The flip side of course is that the GIIPS HAVE THE POLITICAL WILL TO ABSORB THE AUSTERITY PLANS FORCED UPON THEM BY THE ECB AND OTHER CREDITORS. This is the real problem going forward. To merely assume that the POLITICAL WILL IS THERE WILL LEND MANY INVESTORS TO LOSE A GREAT DEAL OF MONEY.
We have already seen that Spanish Prime Minister Rajoy is pushing back at the austerity budgets imposed by outsiders and Mario Monti, the outside imposed prime minister of Italy is currently undergoing pushback from the Italian Labor Unions. France and Greece have elections during the next three weeks and those outcomes are far from certain. Be very vigilante in regards to those analysts that ASSUME A CAN OPENER (HAT TIP TO KM).
***Spain announced that all cash transactions more than 2500 EUROS will be banned as Spanish authorities ramp up efforts to gain control over the black market. The tax collectors are attempting to meet the AUSTERITY BUDGET NUMBERS by raising every EURO possible. A nation willing to start limiting the amount of cash transactions is only a step away from enforcing even more repressive actions. As DEPOSITS EXIT SPANISH BANKS FOR SAFER HARBORS (GERMAN SOVEREIGNS AND BANKS) we can be sure that FOREIGN EXCHANGE CONTROLS ARE ON THE DRAWING BOARD.
A nation suffering the effects a high unemployment and a massive deleveraging cannot afford to be hemorrhaging money out of its banking system. The Spanish banks have loaded up on Spanish bonds through the offices of the ECB’S LTRO PROGRAM. As SPANISH BONDS DECREASE IN VALUE THE BANKS BALANCE SHEETS BECOME MORE STRESSED … just another link in the ADVERSE FEEDBACK LOOP.
The Germans and others may decry another LTRO as the mounting problems are causing many others to rethink. More support is needed and it will come from somewhere as the German and French banks are also on the hook for large amounts of Spanish and Italian debt, as well as U.S. banks that have written CDS on the banks and sovereign debt. The FED and others are very concerned by the day and with the French Elections next Sunday, it may be time for IMF Managing Director Lagarde to announce that huge support package for Europe. Regardless of where the help for Europe comes from, it will be coming as the GLOBAL ECONOMY IS IN NO POSITION FOR A CREDIT COLLAPSE OF THE EUROPEAN SYSTEM. Hello, Ben? Mario Draghi here … HELP.
***In another example of the insanity of Europe, this weekend’s Financial Times has an article titled, “Sarkozy Attacks FT Liberalism.” Even the voice of the EU POLITICAL ELITE questions the attack by Sarkzoy upon the FT’s editorial board. Sarkozy blames the FT for pushing an agenda of Anglo-Saxon laissez-faire liberalism. The FT is so far from being a laissez-faire rag that Sarkozy must be suffering campaign fatigue brought on by the fear of losing the French presidency. In a fit of controlled rage, Sarkozy said: “I am against the FT and the Anglo-Saxons whose liberalism means no frontiers,no barriers. I don’t accept this scandal for Europe to have all our public markets open and for asia to have none.”
This was all in response to the FT having something positive to say about his opponent, Francois Hollande. The FT had another editorial in the weekend paper, explaining to Sarkozy that it has never been the FT’s policy to have totally unregulated markets for there needs to be appropriate rules. The FT is correct about their long-held view on “appropriate rules” and “intelligent banking regulations. “This is just another example of what we have always accused President Sarkozy of being “A SMALL MAN IN SEARCH OF A BALCONY.”