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Natural forces are at work in Europe,
powerful forces, in fact forces that are not evident. It is amazing how
little the financial analysts notice the forces at all. Since the year 2007,
a hidden force began to put pressure on the European Union financial
underpinning. Like any fiat currency, the foundation resorts to debt. It came
to my attention almost three full years ago that Spanish EuroBonds had a yield
slightly higher than the benchmark German. Commentary swirled that the EuroBonds were not homogeneous, and
therefore the Euro currency was badly flawed. They were identifiable by
the markings on the bond IDs. German EuroBonds carry an 'X' in the ID. So the
arbitrage professionals went to work, buying the German and selling the
Spanish bonds. The flaw was to the structural foundation to the Euro
currency, not the market that traded them, surely not the alert speculators.
In time, the Greek, Italian, and Portuguese bonds, even the Irish bonds,
showed significant separation from the German benchmark. Last December, the
Greek bond broke first. Its arrival to the crisis was not part of evolution
(natural selection) as much as European tribal leader selection. Greeks are
neither Latins nor Teutonics. The bust of the EuroBond structure invites the
arrival of a gold-backed currency, urgently needed to provide stability.
A second natural force has arrived in the gigantic bond marketplace.
While as many political analysts as financial analysts promote the wisdom of
a preserved European Union, and a shared Euro currency across that union, a
natural force works to separate the entire group of PIGS nations. Refer to Portugal,
Italy, Greece,
and Spain.
As much force comes from the Nordic
Core power center to push the PIGS nations away from the common European
financial structure, as does the force from the PIGS nations to sever ties
and go it alone. A German banker contact has repeated an important point
on numerous occasions. The European Monetary Union experiment has cost the
nation of Germany
over $300 billion per year, all for what clearly appears to be a welfare
program directed toward the benefit of wasteful inefficient nations not
deserving of a low bond yield. After ten years, the cost has been $3 trillion
to Germany.
It is not a matter of German willingness to continue the Southern Europe
Welfare Program, as much as their ability to continue. They cannot continue.
They cannot afford it.
My forecast made since January was that Germany
would not aid Greece,
but would say all the right things. Their leaders did occasionally show human
tendencies, like when some critics claimed Greece
possessed innate specialty in dance, drink, and song. My longer standing forecast is that all PIGS nations would revert to
their former currencies, the Greeks to the Drachma, the Italians to the Lira,
the Spanish to the Peseta, and the Portuguese to the Escudo. The forecast
is of decentralization and increased local autonomy. However, and very
importantly, the path is a very slow one with political obstacles, face
saving requirements, economic pressures, and social pressures too. Notice the
Germans appeared to be cooperative in aiding Greece,
but when money had to be committed, arguments ensued surprisingly. Not a
surprise to the Jackass. The German High Court will surely reject both the
Greek aid and the Euro usage itself, all in time.
ADVANTAGES OF REVERTED CURRENCY
The political ideals of a unified Europe
are all well and good, but might be fantasy built upon folly in ignorance of
practicality. The national differences are significant in work habits,
industrial efficiency, tax structure, credit practices, federal bureaucracy
load, economic diversity, educational depth, native intelligence, demographic
makeup, arable land & sunny climate, and more. The pursuit of a unified Europe
has proved elusive for a millennium. Not gonna go there here. The pope in the
Dark Ages had the most success, except that its church accumulated an
outsized collection of wealth, even in the form of gold, enough to be a
clandestine global player.
Enter the London
financial analysts and economics brain trust. They have entered the room with some interesting counsel, not the
typical self-serving defense of their system. Instead, a prominent think tank
suggests to Athens
leaders a debt default and return to the Drachma currency. Greece
is urged to leave the Euro currency. We are moving gradually toward a
restructure of Greek Govt debt, and a corresponding stimulus to the Greek
Economy via devalued currency. When tied to the Euro currency yoke, such a
Greek stimulus is impossible. British
economists advise Athens
to abandon the Euro and default on its €300 billion debt under the
basic motive to save its economy. The Centre for Economics & Business
Research (CEBR) out of London
has warned Greek Govt officials of the horrible bind. The CEBR believes Greece
will be unable to escape a debt trap without devaluing their own currency to
boost exports. Greece
must pursue economic expansion, but cannot with the Euro straitjacket.
The only workable path is for Greece
to return to its own currency, the Drachma. To date, the EU Bailout is a
poorly disguised rescue for German and French banks, even London
banks. The dirty secret across Europe is
that the major nations all own a huge raft of PIGS debt, and each nation
within the PIGS pen all own a huge raft of the same debt. Any departure by Greece
from the Euro would create a grand shock for banks across all of Europe,
cause great disruption, and subvert the banker plan for their latest welfare
program in continuation of public governmental adoption. It all ends in ruin.
Doug McWilliams is chief executive of the CEBR. He
said "Leaving the Euro would mean
the new currency will fall by a minimum of 15%. But as the national debt is
valued in Euros, this would raise the debt from its current level of 120% of
GDP to 140% overnight. So part of the package of leaving the Euro must be to
convert the debt into the new domestic currency unilaterally... The only
question is the timing. The other issue is the extent of contagion. Spain
would probably be forced to follow suit, and probably Portugal
and Italy,
though the Italian debt position is less serious." McWilliams called
the move virtually inevitable (in his words) but he minimizes the devaluation
potential. See the Business Times article (CLICK HERE).
The advantages are as numerous as they are deep, all
significant.
Defaulted Restructured Debt: A return to the
Drachma currency would enable a restructure of the Greek Govt debt. Look for
at least a 50% debt reduction, but against a currency devaluation. The Athens
leaders can win a very large portion of debt forgiveness, or else threaten
default. European banks will choose a writedown rather than a total wipeout
loss. These bankers will realize the futility of carrying full debt on their
books, all too aware of the poison pill nature of the compulsory austerity
programs heaped upon Greece.
Economic Stimulus: A return to the Drachma currency would enable a strong stimulus to
the Greek Economy. Nothing is free, however. Currency devaluation is a
double-edged sword. The benefit to be realized with cheaper exports
(including tourism) will be offset by higher energy costs and other import
costs (like cars, cellphones, and machine equipment). The historical
effective tool is for a currency devaluation, one that leads to valid
stimulus but with a steady dose of price inflation. Greece, like other
European nations, is no stranger to socialist solutions to spread the misery.
Poison Pill Revenge: A return to the Drachma currency would enable a national rejection
of the IMF/EU poison pill solution. The austerity measures have no precedent
of effectiveness. They are ruinous, lead to greater federal deficits, worse
unemployment, and more social disorder, yet the Banker Elite continue to push
such non-solutions. Rejection of the austerity programs would incite a
national rally of pride and celebration. Obviously, when Greek reverses the
austerity cuts, the maneuver would ensure a second thump one year afterwards.
Bloated government payrolls would remain, at a heavy cost. The Drachma would
suffer a continued devaluation later on. Stimulus would be required in
additional doses. The shared pain from price inflation would follow.
Autonomy & Control: A return to the Drachma currency would enable a national movement for
the Greek people to take control of their fate. Their population feels on the
receiving end of dictums and forced solutions, complete with massive job
layoffs and budget cuts. They detect duplicity, since other nations in Europe
are in violation of guidelines. Nevermind that something like 11% or 12% of
all Greek jobs are located within the government sector. Turn a deaf ear to
the rampant tax evasion and other corruption that might be more prevalent
than Italy. The psychological benefit to a reversion to the Drachma is to spit
in the faces of bankers and to take the reins of national control. This has a
value in national pride and spirit, which ironically would avoid most
internal reform.
PRECURSOR TO NEW NORTHERN EURO
Prepare next for
a Euro currency with a more trim look, one with the PIGS fat trimmed off. The next three big big shoes are about to hit the
floor, with severe crises erupting much worse for Spain, Portugal, and Italy.
Banks in those nations will suffer failures, liquidations, stock declines,
CDSwap contract rises, rescue requests, mergers in desperation, and more.
These three nations represent the remainder of the famed PIGS descriptor, as
Greece has captured far too much news and attention. When the Greek Govt debt
news broke out and was developed from February through May, was Spain deeply
committed to reform? NO! Was Spain deeply involved in liquidations and bank
asset writedowns? NO! They delayed. Attention turns to the other PIGS in
distress. Greece has served to distract attention not just from the other
PIGS nations but from the United States and United Kingdom as well. Sovereign
debt default will not end as a story until the USTreasurys and UKGilts
default, even if technical defaults. All
four PIGS nations will be removed from formal Euro currency participation.
Economics and nationalism dictate it.
Prepare next for
a Euro currency with a more trim look, one with the PIGS fat trimmed off. As
the PIGS sovereign debt is discharged, written down, and defaulted, the
demand will increase for the survivor Euro core, the healthy strong core. The new Northern Euro currency will
initially be comprised of a PIGS-less Euro, which awaits on the other side of
the door, here and now. The PIGS-less Euro currency will have much
less debt to refinance in the short horizon. The PIGS-less Euro currency will
have much stronger fundamentals with smaller annual deficits and better
looking debt ratios versus economic size. The PIGS-less Euro currency will
have a much healthier trade surplus picture. The PIGS-less Euro currency will
realize much greater respect in a faith-based fiat world. But it is a
transition vehicle.
The events in the next few months regarding the
European Monetary Union are set to accelerate rapidly. The Greek Govt debt situation was replete with
delay, debate, deliberation, confusion, distortion, false starts, deceptive
fixes, reversals on decision, difficulty in endorsement, revealed lies on
debt volume, harsh criticisms, low blows, violence, and much more. The new
few months will be different. One well connected banker source told me a few
months ago that the Greek debt situation will come to a resolution, all
rescues will fail, as default is inevitable, complete with a return to the
Drachma currency, but afterwards, the default of Italy and Spain will occur
with lightning speed. He expected the events to occur in a fast chain
reaction. We are seeing it.
The transition currency stripped of PIGS fat-ridden
lining will eventually make way for the new Northern Euro. It was described in last week's article. It will
contain much more independence among its members and their central banks. It
will contain an embedded gold component. Watch in the future for a crude oil
component, even possibly OPEC oil sales tied to new Northern Euro currency
payments. Time will tell. Events are moving rapidly. The PIGS-less Euro currency forces the monetary issue, as it demands
a better and more perfect form of currency. An old maxim goes "A paper currency cannot be replaced
by another paper currency, but rather by a metal currency." How
true!! Regard the PIGS-less Euro currency as a vehicle whose arrival will
serve as a penultimate event in the Competing Currency Wars. The arbitrage
will continue to pull apart paper currencies, tethered to lost integrity and
faded trust. The PIGS-less Euro currency will require the broader adoption of
a strong viable realistic currency born of crisis, a currency formed in a
golden crucible.
The reversion to
local currencies, complete with more autonomy taken back by individual
central banks, will demonstrate a strong DECENTRALIZATION TREND. Even the new
Northern Euro currency will feature greater decentralization. Those who
feared a continental Amero currency for North American usage, a sustained
Euro currency for European usage, and an emerging Yuan currency for Asian
usage, must go back to the drawing board or replace the perceptual prisms. Prepare for several gold-backed new
currencies. China is talking of a gold component to the Yuan currency. So
is Russia. My hunch is that Russia will either participate in the new
gold-backed Northern Euro currency or launch its own gold-backed Ruble
currency.
The Americans and
British will be last on board, as their nations tumble into the Third World
where corrupt leadership and tight corporate mergers are their calling cards.
Gold will be the stability mainstay,
the common anchor applied across the world, but its application will enable
decentralized power to be managed. Gold will emerge as the great
liberator. Those nations first to embark on true remedy and reform will be
the new global leaders. Those nations stuck in stubborn refusal will elect
themselves Lord of the Flies in the Third World, where apparently oil-soaked
shorelines and dead marine ecosystems will be the norm, maybe even toxic rain.
ITALY NEXT ON THE BLOCK
The Italian Govt debt picture is seriously distorted.
Financial analysts point to more favorable debt ratios as a proportion to
their larger economy. The debt volume
in Italy to be refinanced this year alone is almost ten times that of Greece.
The important factor is the volume of short-term debt to be financed, that
must come from the bond market. So what if its ratios look more
favorable? The money aint there!! Over half of all the 2010 total finance
needs for PIGS nations plus Ireland are derived from Italy alone. The needs
for Italy diminish somewhat in following years, but the volume remains grand.
Unlike other European nations, the Italian vendors and shopkeepers have
maintained a stubborn habit of showing sales receipts in both Euro terms and
Lira terms over the years. Never argue with an Italian, since their hands
move faster than others.
The Italian Govt debt is under sharp attack. During this week, the
sovereign risk returned with a vengeance as the Italian Govt debt took heavy
blows. The reminder is stark, that sovereign debt is a major contagion across
all of Europe. The Credit Default Swap contract, which insures the 5-year
bond, rose in a big way on Monday. MarkIt
reports the Italian CDSwap went from 200 basis points to 250 bpts in a single
day, to mark a new record high level. The new story to replace Greece has
arrived to take away attention in the financial news media. The contagion is
spreading globally now, even to South Korea, far beyond Iceland from two
years ago. An important new trend evident in the last few months is the
appearance of sovereign nation debt as the most actively moving in the
official CMA reports. The trend of national debt struggles and deep distress
will continue until a true monetary anchor can be constructed, fashioned of a
gold alloy, urgently needed to provide
stability.
SPAIN NEXT ON THE CROWDED BLOCK
The Spanish Govt debt picture is seriously distorted,
in different ways. The banks in Spain
have chosen to ignore the reality of lower property prices, and have carried
credit assets at absurdly high values. It is safe to say that the Spanish
banks are ready to enter freefall. A major shock comes to Spain.
For well past a year, they have refused to mark down much of any credit
assets tied to property. Furthermore, their property markets have refused to
mark down prices seeking buyers on the open market. The result has been a
mammoth reduction in sales volume, as sellers want prices that buyers are
unwilling to offer, with huge price gaps that are sometimes described as
comical. Reality is set to strike, and strike very hard. The Greek focus will soon turn to Spain, and also Italy.
Not being an expert, this analyst regards the Caja
sector of the Spanish banks to be the large group of savings banks. They are
all operating in a fantasy land, as their credit portfolios have been
shattered for a long time. The common practice of carrying lofty valuations
is slamming against the wall of reality. The Spanish Govt has been attempting
to enforce a grand restructure process among its cajas. They are in deep debt
and teetering. Merger with larger banks is seen as a potential solution, but
that constitutes fusion of insolvent pieces with bad glue. The Govt has
created a Fund for Orderly Bank Restructuring, (FROB) to facilitate the
process. Usage of the fund comes with a timetable, as the savings banks have
until June 30th to make formal requests for the money urgently needed. The
FROB fund has a total value of €99 billion and is funded with €9
billion of capital and up to €90 billion of new government supported
debt. Yet more monetary inflation enters the picture.
The savings banks within the Spanish Caja system
total 45 in number. They, like the bigger banks, have stalled on taking
proper liquidation and writedown action. The Bank of Spain has stirred things
up with a recent seizure of troubled Cajasur one week ago. Other merger
announcements have followed. Cajasur had a distinction, since its board of
directors contained some stubborn priests, who refused to merge with the
bigger Unicaja. Bank analysts are
coming to the conclusion that the collective costs of the bailouts in Spain
by their government will be an order of magnitude higher than what it
anticipated. The Spanish Govt deficit ran at 11.2% of GDP in 2009. That
ratio must come down. My forecast is that it will rise, not fall. The reason
is simple. Just like with the United States and United Kingdom, no reform has
come, no bank liquidations have come, no housing market remedy has come, no
initiatives to plow under generally have been embraced, and those in charge
of the disaster remain at their posts. So the banks will face continued
losses. So the housing market will face continued declines. So
the economies will face continued recession.
Rumors swirl that Caja Madrid said
to ask for €3 billion of aid from the official rescue fund. The news has captured much
attention since it is the second largest among the cajas. By the way, caja in
the spanish language means box, cage, booth, register, teller unit, or
repository. Confirmation came in the form of an official denial by the bank,
calling it speculation. The savings bank did reveal last week as being in
talks to merge with several regional cajas. Caja de Avila,
Caja Insular de Canarias, Caixa Laietana, Caja Segovia, and Caja Rioja were
mentioned.
COMPARTMENTALIZED
PERCEPTIONS
Think nation, not bank! Until 2008, perceptions and
evaluations of the banking sector were specific. Talk was about Santander in
Spain, their big bank, and not about Spanish Govt bonds. Talk was about
Societe General in France, and not about French Govt bonds. Talk was about
Royal Bank of Scotland and Northern Rock and Lloyds in Great Britain, but not
about UK Gilt bonds. Talk never was much about individual Italian or Greek or
Portuguese banks. But now, talk is replete with Italian and Greek and Spanish
Govt debt securities, and not of private banks. The line of thinking, the analysis, the focus is much more directed
at national debt exposure, the sovereign debt. The insolvency of big banks
has been transferred to insolvency for entire nations and their governments.
After 18-20 months of shifting the debt risk from individual banks to the
government balance sheets, the impact has finally come to be felt. The
sequence of formal debt downgrades reads like a parade of disasters, mostly
concentrated on the distressed nations and their sovereign debt. It has
become a global phenomenon, since Korean debt, Brazilian debt, and other
nations have joined the sovereign debt crisis. Remember that the clownish
popular financial analysts called the Dubai debt default isolated. My
analysis actually forecasted the Dubai debt event over three months in
advance. My analysis also pointed out the interwoven nature of the sovereign
debt exposure, since banks across London, France, Switzerland, and Germany
share the debt risk as underwriters and investors. We have vividly seen the
interwoven debt exposure.
The Spanish Govt debt situation has provided a gloomy
cloud over their entire banking system.
Last week, Fitch Ratings became the
second major ratings agency to downgrade Spanish sovereign debt. They marked it down to AA+ from
AAA. Standard & Poors had cut the same Spanish debt rating back in April,
lower than AAA. In their formal announcement, Fitch stated belief that the
unemployment rate in Spain over 20%, along with the reversal of fortune tied
to the construction boom, will weigh heavily on their economy struggling
under extremely high debt burden levels. Neither the Spanish Govt nor their
banking leaders have any firm resolve or grip on the situation. Recall that
delay to remedy and reform always results in much worse bank losses and much
deeper economic recession. Their government has delayed on bank accounting
practices, and only last week worked the austerity measures through the
Parliament by a single vote. Fitch offered a mealy mouthed vapid statement
about how the special FROB fund to clean up their banks should be sufficient,
in a total denial of the depth of the problems and future losses. The FROB
fund is designed to aid the caja banks heavily exposed to the real estate and
construction sectors. Fitch noted that their restructuring process is
progressing slowly, which means not quickly enough. The politicized wrangled
process could intensify constraints on the supply of credit and affect the
pace of economic recovery for the country, so claims Fitch rightfully so.
The next three big big shoes are about to hit the
floor. The bang will reverberate around the world. The Spanish, Portuguese, and Italian banks will next go belly up and
quickly, as they sink with PIGS debt and other credit assets tied to fallen
property. Spain will make the most shrill sounds, for a simple reason.
They were the worst offender in holding onto mindless unreasonable lofty
property values. Their bank books have the biggest drop to realize, after
re-entry to reality. The crises underway in the remainder of PIGS nations
will continue unabated, and usher in magnificent events where a legitimate
gold-backed currency arrives, urgently needed to provide stability.
Jim Willie CB
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