"Ah, nowadays we are all of us so hard up, that the only pleasant things to pay are compliments. They're the only things we can pay."-Oscar Wilde
By Mark J. Grant
There are those that wait and hope and pray that there will be Divine Intervention. They cling to the belief that Germany, in the end, will back down and retreat and agree to bail everyone out. Germany’s GDP is only $3.2 trillion and this expectation, believed in by more than a few, is not only ridiculous in my opinion but a mathematical impossibility. If you just take the example of Spain where $125 billion has been pledged to fix its banks and you put it in perspective the situation becomes clearer. As with many things, if they are discussed in the platitude it seems reasonable but when taken down to the hard numbers; a different opinion emerges. If you take just this $125 billion for Spain and consider that the United States has a GDP twelve times that of Spain and that the equivalent number would be $1.27 trillion which is $577 billion more than that was authorized by Congress for our TARP program then you begin to see the enormity of what is taking place in Europe. Next consider that Germany’s GDP is 22.3% of America’s and try to imagine what the troubled nations on the Continent are asking of Germany and why they keep saying “No.”
They refuse for a very simple reason; they can’t afford it. They do not have the amount of capital that is necessary to keep bailing out the troubled nations of Europe. Then if you consider the current EFSF program and that $300 billion has already been used for Greece, Ireland and Portugal and that this new assistance program for Spain will take it up to $425 billion you begin to get some sense of the enormity of the problem. The U.S. equivalent then for the total EFSF would be $4.318 trillion or 30.4% of America’s total GDP which would swamp our nation. This is why when I listen to Frau Merkel say “Nein;” I believe her!
“Hope is itself a species of happiness, and, perhaps, the chief happiness which this world affords: but, like all other pleasures immoderately enjoyed, the excesses of hope must be expiated by pain; and expectations improperly indulged, must end in disappointment. If it be asked, what is the improper expectation which it is dangerous to indulge, experience will quickly answer, that it is such expectation as is dictated not by reason, but by desire; expectation raised, not by the common occurrences of life, but by the wants of the expectant; an expectation that requires the common course of things to be changed, and the general rules of action to be broken.”-Samuel Johnson
It seems, some days, that the markets are waiting for a “Lehman Moment.” The arrival of some Black Swan to commemorate the fact that the financial system has fallen off the cliff or perhaps they are waiting for the ECB, which already has a balance sheet of $4 trillion, to raise it to $15 trillion to save the arrogant of the world and rescue the debtors from the prison that they have built for themselves. The fact that the ECB can print money will not save it from investors who are fleeing their charge. These would be “real money” institutions and not the hedge funds and various speculators intoned as the evil denizens of the Devil himself. There is no firewall that is high enough or barricade that is strong enough to stop people from fleeing when it is obvious that those corralled in the castle have the Plague.
“He knew quite well that it was plague and, needless to say, he also knew that, were this to be officially admitted, the authorities would be compelled to take very drastic steps. This was, of course, the explanation of his colleagues' reluctance to face the facts.”-The Plague, Albert Camus
The Spanish Bank Stress Tests
GUINDOS SAYS STRESS TESTS HAD VERY CONSERVATIVE ASSUMPTIONS-The Economy Minister of Spain
Please allow me to elucidate this situation for you. The two consulting firms that performed the Spanish bank stress tests did nothing, not one thing, but take the information provided by the Central Bank of Spain. There was no bank examination, there was no outside assumptions made about the Spanish Real Estate markets, there was no examination of how loans or mortgages or securitizations were carried on the books of any Spanish bank. It was the normal European Union trick which we have witnessed a number of times now where conclusions are made and paraded around in the public which are based upon highly suspicious data and I am being kind here. One thing that can be absolutely be said with 100% accuracy is that if no independent examination was made of the actual numbers and of the value of Real Estate and the loans appended to them then the value of the stress tests has all of the worth and reality of Maria del Sol, the flying pig attired in Prada sunglasses and carrying a Chanel purse. She may be the new friend of Don Quixote and of Prime Minister Rajoy but let’s not use this pig as the basis for our investment decisions.
The EU Summit
It is the twentieth Summit. I predict it will be the twentieth time that almost nothing is accomplished. The beggars want to be the choosers and Germany and the richer nations will hardly allow for that. The bureaucrats and the residents of Brussels are calling for all manner of schemes to harmonize the European Union. The people in Berlin are not, under any circumstances, going to allow their cost of funding to be the blended cost of all of Europe nor will they allow for their standard of living to be equivalent to those in Athens, Lisbon and Madrid. The German gesture towards this envisions absolute control of all of the budgets of each nation and the Dutch and Finland have already replied “No” to this very polite offer made by the Holstein Empress. The Germans surely know that this will not happen either but it is a convenient political ploy to toss out to their struggling cousins. So the begging will continue, the pleas for more alms will intensify and then the Troika will inspect Greece and find so many promises broken and so many fantasies created that Germany will say “Nein” to continued funding and then the next phase of the crisis will begin and the Great Greek Moment will begin as the country defaults on $1.3 Trillion of its obligations as the intended and unintended consequences resonate with the Big Bang that so many have waited on.
The Greeks, as part of their tradition, like to take plates and smash them on the floor. The famous Greek movie, “Chitty-Chitty Bang-Bang” was written about this of course. The sequel, “Lie-Lie Explode-Explode” is expected out any day. Athens predicts a rousing success but critics who have previewed the spectacle expect a Bomb.
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