I am posting today’s story on the Santelli Exchange I taped today. Rick and I were back on the most important topic facing the world: THE ECB’s ROLE IN CREATING A SITUATION THAT MAKES GERMANY LIABLE FOR THE DEBT OF THE ENTIRE EUROPEAN UNION. The world is still abuzz about the BREXIT referendum and its implications for the U.K.. There’s also chatter about what it might mean for other EU nations contemplating STAYING OR GOING in terms of subjecting their citizens to the capriciousness of Eurocratic regulation. The question for me (and will continue to be): WHO GUARANTEES THE ECB, AND, OF COURSE, THE COROLLARY QUESTION, SHOULD ALL SOVEREIGN DEBT BE A ZERO WEIGHTED RISK ASSET CLASS?
As I discussed this topic with Rick, I mentioned I had the opportunity to ask FED GOVERNOR Jerome Powell this question at the Chicago Council on Global Affairs meeting of June 28. The FOMC Governor failed to answer my question about the zero risk weighting of all sovereign debt and his perfunctory answer as to who guarantees the ECB, he said THEY HAVE A PRINTING PRESS. It is patently WRONG to compare the Fed’s ability to print money with the ECB‘s hoped for ability to provide ink and paper for paper money. The FED has the full support of the U.S. Treasury’s taxing authority standing behind its QE programs but the ECB has no such fiscal authority as its guarantor. It is the market’s acceptance of the full faith support of Germany that is responsible for the success of Draghi’s “whatever it takes” program. If the Germans were to demand a vote on EUROPE the shock waves would render the BREXIT aftereffects a small wave relative to a German promoted tsunami.
President Draghi is in a hurry to accumulate more and more debt so as to make any German NEIN a systemic event. If the ECB balance sheet is loaded with the sovereign debt of Spain, Italy, Portugal and others then a German effort to reduce its liability would cause a collapse of the entire European financial system. Remember, the Italian, Spanish, French, Dutch, German and other domestic bank balance sheets are loaded with domestically issued sovereign debt and they currently are NOT REQUIRED to account for any reserves against these assets. If you believe Italian banks are under severe stress now contemplate their capital needs if the BIS were to adjust the Basel rules and render not all sovereign debt a risk-free asset for banks. If you want to feel the effects of a negative feedback loop let the BIS become a more objective rules maker. Again, Mario Draghi is adhering to rule number one of finance: If you owe the bank 10 billion it is your problem, but if you owe the bank a TRILLION it is their problem. The BRITS removed themselves from direct responsibility of the ECB debt issue. Maybe they weren’t no-nothings after all.
Also, it’s interesting that Chancellor of the Exchequer George Osborne threatened British taxpayers with a tax increase if Britain left the EU. Yesterday, the same George Osborne suggested cutting U.K. corporate taxes in an effort to entice business to remain or immigrate to London and beyond. The POUND has dropped 10% versus the euro, which will aid in the correction of the U.K.’s steep current account deficit as British imports become more expensive and exports cheaper. Greece, Spain and Italy can only dream of such flexibility as the only alternative for EURO currency members is a bout of internal devaluation to correct budget and current account imbalances. The need for internal devaluation is responsible for the depression level unemployment numbers in Spain, Italy and Greece.
Further, this weekend brought news that Paris and Berlin were pressuring the European Commission and President Juncker to halt proceedings on a free trade agreement with Canada. One of the arguments of the British “Remain” camp was that British trade would be adversely effected by LEAVING but it seems that Britain will be able to negotiate faster with other nations by not being in the EU group of 27. The U.S./European TTIP agreement won’t be approved for at least two years in which it will happen that the U.K. actually moves to the front of the queue. Again, to get a qualitative perspective on the morass of Europe, read the “ROTTEN HEART OF EUROPE” (can’t tell the players without a program). And Europe will be the epicenter of the financial crisis as we head into the second half of the year.