And so it goes. As the light lifts off the European “bailout” it appears that most analysts agree that the “Agreement” was a lose-lose for the European Project. The Germans stood firm and placed unduly harsh demands upon the Greek electorate that had the temerity to openly reject the terms of debt resolution. Merkel had favored a real compromise until Alexis Tspiras deployed the nuclear option and went to referendum in an effort to better be able to negotiate with an intransigent Djisselbloehm and his ECOFIN council of Grand Inquisitors (see the Brothers Karamazov). The punishment meted out to the Greek nation is a loss for them but ultimately the real loss will be on Spain, Italy, and, of course France. The Germans have revealed that the use of Berlin’s money to support the EU is going to come at a price and it is the acceptance of an economic model for Europe that is German, its backdrop of course being sound money. Not the strong dollar mantra of the U.S. Treasury Secretary but an actual strong currency, at least until the German financial system enters a fragile state.
The peripheral nations, France included, are all countries that have large debt loads to finance while the Germans have a savings-based system and are not saddled with heavy debt. This is a major problem as the world moves on from the midnight tweets of the Greek crisis. Savers want stable prices while debtors rely on the “kindness” of inflation. Merkel’s conundrum is that ultra-low interest rates punish Germans while rewarding the “profligate” spendthrifts and freeloaders of the debt-plagued nations. The FED has dealt with this issue by reminding all Americans that while your interest earnings are low your neighbors and grandchildren have received the benefits of zero interest rates with a greater chance of finding a job and affording a home or college education. As Americans we are all in this together. In Europe, the Germans have sent the message via the Greeks, that if it is our money guaranteeing the credit rating of the EU then it will be our rules for there is no concept of one for all and all for one.
The established elites of the eurozone breathed a sigh of relief Monday morning in the belief that the Greeks upstart Greeks were punished and any other groups challenging the establishment will be severely thrashed. The problem will be when the referendum arrives on German soil. When some aggrieved group threatens to call the question on German money transfers and/or the quiet confiscation of wealth through the financial repression of savings by the unelected ECB. At a recent ECB meeting, President Draghi was met with a garbage can of paper as an act of obedience. Notice has been served. Oh, wait. I must be mistaken for the equity markets are higher.
***Some Gallows Humor: The New National Anthem of Greece is Tennessee Ernie Ford’s “Sixteen Tons” for the Greeks it is another day older and a deeper in debt and they owe their souls to the company store.
***There’s more proof that money is fascist, craving political stability and economic certainty over political freedom, watch the CNBC interview with Wilbur Ross. Now, I respect Mr. Ross as a top-notch investor, but he was very uncomfortable with his large bet made on Greek banks and its financial system. Ross has invested more than a billion dollars in Greece in the last few years hoping for a reasonable resolution to the financial crisis. Therefore, he believed that Greek banks were cheap. However, if Tspiras and Syriza continued down the path of Grexit those investments would sour. In the interview Ross believes the “AGREEMENT” is good for the Greek people and returns a sense of responsible leadership to Athens, meaning his bet MAY pay off.
The crown of lender-in-chief rests very uneasy on Wilbur’s head for political violence could erupt, or, even more possibly, the Greek banks may well be nationalized (as was threatened by Western democracies at the height of the financial crisis in 2008-09). Stability for the financial establishment and crushing austerity for the populace–FASCISM–overturns the results of direct democracy.
***Returning to a favorite theme: The BUND/OAT spread, while very volatile, is a direct play on existential question of contemporary Europe. It is the French-German agreement that is the center piece of the EU,or as de Gaulle famously remarked, “Europe is France and Germany the rest merely the trimmings.” If Germany balks at its role as financial guarantor the EU countries will have to pay real risk-based returns on its borrowings. Spain’s current rate on 10-year notes is 2.13%, Italy 2.12% and Portugal 2.80%. These are rates that are covered with the German credit card. The current French 10-year rate is 1.23%, 39 basis points above the 0.85% on the German 10-year. The French/German differential during the last five years has been a low of 17 basis points and as wide as 190 basis points in November of 2011.
This range will be a very good barometer of any sense of ANGST in the EU. Currently there is no existential fear about the axis of European comradeship. There is hope that the lesson taught to the Greeks will keep all the other EU members in the role of “trimmings.” The next issue that will confront Brussels will be the renewed push for a EUROBOND, which will need the total support of Germany and right now Chancellor Merkel will not want to confront a population that is seeking to punish the profligate.