Friday, October 21, 2011

The Battle For Europe

From all the news flow out there it appears to me that we are nearing a so-called "inflection" point in the European debt crisis.  After a summer and early fall of spinning wheels to no end, European leaders are faced with a stark choice: finally do something serious, or watch the entire euro structure fall apart with unimaginable consequence for the European Union as a whole.

There is a eurozone summit meeting this weekend, to be quickly followed by another one three days later on Wednesday.  If the Franco-German axis (no, I do not use the term lightly) does not reach a mutually satisfactory agreement on Greece, expanding the EFSF and bank recapitalization then the inflection will point straight down.

The Battle for Europe is, tragically, being fought by generals who are well out of their depth.  They created a continent awash in funny money and a population that for decades felt entitled to their comfortable - albeit debt financed - lifestyle. Oh yes, even the holier than thou Germans;  I mean, how else could  those "other" Europeans afford to buy millions of BMWs, Airbuses and Miele washers exported by Germany if not through debt?  It's not as if Kalamata olives or jamon Serrano have much value-added, after all. And vacations in Terremolinos, Rhodes or Costa Brava are on perennial all-inclusive, cheapest-is-best  offer...

 Let's Hope It Doesn't Come To This, Again

Europe desperately needs a whole new cadre of strong and decisive leaders who will turn things around.  Maybe the current ones will see the light and pave the way for them by gracefully bowing out, after taking whatever steps are necessary right now to forestall implosion. But, I'm not holding my breath..


13 comments:

Anonymous said...

I mean, how else could those "other" Europeans afford to buy millions of BMWs, Airbuses and Miele washers exported by Germany if not through debt? It's not as if Kalamata olives or jamon Serrano have much value-added

I mean, how else could those "other" people afford to buy billions of tee-shirts and shoes, I-pods, phone sets and other gimmicks built by Asia if not through debt? It's not as if [US-product of your choices] have much value-added.

Europe desperately needs a whole new cadre of strong and decisive leaders who will turn things around. Maybe the current ones will see the light and pave the way for them by gracefully bowing out, after taking whatever steps are necessary right now to forestall implosion. But, I'm not holding my breath..

The whole world desperately needs a whole new cadre of strong and decisive leaders who will turn things around. Maybe the current ones will see the light and pave the way for them by gracefully bowing out, after taking whatever steps are necessary right now to forestall implosion. But, I'm not holding my breath.

The intra-European crisis is only a limited edition of the international one.

Alas the chances that the latest can be resolved in the way that is similar to the current the current path of resolution of the intra-European crisis are next to nil.

China and Japan, and Asia as a whole, are financially as exhausted by the termination status of the BW2 even more than Germany-Netherlands-and-al are within the Euro arrangement.

The Euro imbalances are ten years story. What about the BW2?

In the end, in a crisis situation, the cultural ability to solve the issues in a decent negotiated way are not on par.

I feel no joy at this crisis. It is an OECD one. But can tell you we definitely feel the Wall Street felicity at the potential demise of our currency.

Wall Street has dealt a blow to the the transatlantic friendship that could prove lethal. Another great production of the current banking arrangement:)

Anonymous said...

Err, Miele is French not German!

Anonymous said...

"a population that for decades felt entitled to their comfortable - albeit debt financed - lifestyle"

I wonder how many people are aware of that their lifestyles are a product of their government's debt. People have a way of assuming things are "naturally this way". Totally unaware that its actually very complicated to get toilets to flush, cereal into grocery stores, cell phones to charge, etc.

In summary, many probably believe that there was/is a way to have our current lifestyles without the debt and funny money.

dennis the menance said...

I see no end to the debt crisis in europe' jim rogers has commented recently that the only real solution to this problem and the problem of that national debt of the united states is for these countries to just declare their inability to repay their debts' and than just default.

camabron said...

Anon: Miele IS German http://en.wikipedia.org/wiki/Miele

Rufus said...

"The Battle for Europe is, tragically, being fought by generals who are well out of their depth. They created a continent awash in funny money and a population that for decades felt entitled to their comfortable - albeit debt financed - lifestyle."

Where does the greater responsibility for this economic anomaly lie? With corrupt politicians and greedy workers that feel entitled to a comfortable life? Or the tricksters in the financial system?

The reason for a Hitler is the breakdown of social order. A major part of this breakdown is perceived inequity and lack of enforcement to re-balance the scales. Hitler is the people's response of frustration to a perennially rigged game.

Hellasious said...

"Hitler is the people's response of frustration to a perennially rigged game."

..true and very, very scary. I may add, it's the peoples' response once they are converted into a "crowd", or a "mass".

Regards,
H.

Anonymous said...

Hello Hell.

Rich H / (Miss America) here.

OK… you’re my go to guy on this stuff. (as I assume you know, I love your foresight/analysis)

Now with the whole Greece debacle “fixed” what are the downstream effects? (I thought Greece was still operating in the red so even if there was a 100% haircut, they still couldn’t meet their demand, let alone still trying to even meet the other half of the 50% they still owe and probably can’t repay… but what do I know)

I know this isn’t your job to educate me. (ha - It’s not mine either!!!)

…but what are the downstream effects of this not being a credit event?
…and what does this do for the bond market???
…or the CDS market???????

The way I understand it, since the creditors voluntarily took the haircut, rather than the debtor being forced into it… this is what is/was the determining factor on whether this is a “credit event”. Is that right?

…and now for those other PIIGS, (or should we say PIIgS) why would someone ever buy CDS on them??? ever? For the billions to trillions of dollars that have been waged on whether or not Greece would fail, and whether or not their fellow PIIgS would fail, have the values of these CDS potentially dropped to 0?

Likewise, how does this effect the bonds themselves? If Ireland has a bond issued at 6%, won’t there be no buyers? @ 7%, nope, 8% nope, 15% nope, etc… since default/haircut risk has shot up to 50%, while at the same time the trillions of dollars hedging CDS programs (built to calculate all these factors) have potentially turned worthless???

Or is this a good thing?

Does this help Greece turn a corner? (can the debt be wiped out and absorbed by non-inflationary printing (because if we all print, (US, EUR, GB, JP, etc) then no one loses) …and does this get the ball rolling in the right direction for a country like Greece??? …assuming they actually get their house in order? even though they still haven’t really “fixed” anything.)

I can’t map this out. I think it’s bad. Very bad! …but I think there may be some upside that I am not seeing or logical theories I haven’t grasped as to how this can be good.

(Forget the legal aspect of this, whereby, if I and millions of others are technically “creditors” to Greece, and I, and millions of other did not agree to this haircut.)

Ahhhhh…. too much for me to get my head around.

Can you help?

Thanks again.
RH/MA

Anonymous said...

you still have doubt it will not happen?

Hellasious said...

Hey Rich... when you ask, you ask a ton of questions, man! (smile).

The Greek debt crisis is very, very far from being over. What happened last Wednesday was, in sum, a POLITICAL action and nothing more. As we all know, in finance it's not the devil that is in the details but the whole thing. In other words, no details, no deal.

And there have been NO details announced or even forthcoming soon. So, in truth, there was NO deal.

Addressing your points..

Yes, if Greece does not immediately swing to a primary budget surplus even a 100% haircut will not work. They have promised a surplus in 2012, so we'll wait and see.

As for CDS: I believe the market (such as it is) has gone beyond insuring against default. It is, in a way, a "shadow" primary bond market, i.e. issuance of CDS has become equivalent to issuing credit instruments/bonds. It is not identical, of course, but this aspect of the CDS market is very troubling to me. I had dealt with this topic some years back, when I wrote a series on the CDS market.

"Voluntary"? Yeah, right! It's as voluntary as handing over your wallet when a mugger threatens to slit your throat. But, hey, you have a "choice"!

Can Greece turn around? Yes, eventually. But there is much, much more involved than debt. As in the rest of the West, the Debt Crisis is a symptom of economic malaise, not the disease itself.

fajensen said...

Good luck with selling the EFSF-bonds (to suckers) while at the same time voiding all CDS on Greek debt (without even reading the customised contracts).

Without CDS's the EFSF bonds will "consume capital" on the balance sheets of investors making them even less attractive.

I.M.O. neither the CDS nor the vast, off-balance-sheet, unregulated financial market should exist - but the EFSF *requires* those components to be even remotely possible.

Anonymous said...

Europe doesn't need any more concentration of power,any more centralisation either 'democratic' or clearly reserved for the same 'experts' who made this crisis happen. Deliberately, might I add.

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