by
Mark E. Grant
As Industrial Production falls
-0.6% in Europe and as the economy shrinks -0.2% there is once again a good
reason to pause to consider the ramifications for this going forward. As part of the data release this morning Germany
and France did somewhat better than expectations but it was fairly marginal
while the rest of the EU-17 continues to be mired in difficulties. Overnight
LCH increased the margin requirements for both Spain and Italy as the banks of
Spain keep increasing their borrowings at the ECB which is now at an all-time
record. More troubling perhaps is the recent release of data from Italy which
showed that their sovereign debt had ballooned to $2.437 trillion and the
trajectory is more than troublesome. In 2010 and 2011 Italy’s debt was
expanding by $7.90 billion per month but in 2012 Italian debt has increased by
$11.73 billion per month for a projected $141 billion by the end of this year.
In fact the Italian economy is shrinking by about -2.5% while their
debt is growing by 5.8% which is the baseline for an unsustainable situation if
these trends continue.
To make matters worse Italy’s Industrial Production is
down -8.2% from a year ago and down -1.4% in the last
month. I think Italy must be reassessed in light of the recent data and I would
project further downgrades for the country and an increase in their bond yields
as people recognize the severity of their problems. To me it looks increasingly likely that both Spain and Italy will
soon line up at the feeding trough which is going to strain Europe,
in my opinion, past the limits of what France and Germany can bear and then all
of the superlatives and all of the great hype are going to come face-to-face
with a very tough reality I am afraid.
Learning from the Numbers
When you sit back and take a hard look at the last two
years you begin to learn a few things. If you just
stick to the actual data and forget the rhetoric that surrounds it the picture
becomes clearer. Each and every projection for Greece, Spain and Italy that has
been forecast by the EU and the IMF has been wrong; dead wrong. This would be in overly optimistic to
the point that anyone relying on these projections and investing on their basis
would lose money as a result of believing in them. I submit then that it is a
mistake going forward to accept their numbers as reliable and you should note
this in your thinking.
When I stop to consider all of
the talk, all of the bravado and all of the concentration wasted on Firewalls I
am convinced that it was all a great waste of time. There is only $65 billion
left in the EFSF and the ESM is not in existence and a tremendous amount of
money has been spent not just by the Stabilization Funds but in the Target2
program and by the ECB trying to ring fence the core nations of Europe and none
of this has stopped or helped the recession in both Italy and Spain. Europe has
wasted a giant amount of time and money battling with windmills, the ever
present evil speculators of course, but none of this has helped the two
countries regain a sound financial footing and the austerity measures have done
nothing except to make matters worse as the economies of these two countries
suffer from their imposition. The European
game plan has been flawed in my view and we are all beginning to see some
actuality which is that all of the grand plans have made matters worse.
In some sense Europe is damned if they do and damned if they don’t but there is
no way to avoid the conclusion any longer that they are stuck in a quagmire
from which there is really no escape without a lot of serious pain.
I think it can be accurately stated that the political rhetoric is no better in America than in Europe. The problem with Europe is that there
are seventeen countries using the Euro each with their own national interests
that are becoming more and more polarized between the healthy nations and the
financially impaired countries. In fact there are only a few nations left in
Europe that are in decent shape so that the bedrock is crumbling from beneath
the construct and everyone wants everyone else to pay the bills which is
becoming impossible as Germany, given its finances, increasingly finds itself
in a very lonely corner. The key to winning in Europe is to watch what they
actually do and not what they say they are going to do or what they might do. Time after time we have been disappointed by the actuality of
their response and to hang your hat upon grand proclamations, such as the
recent one by Draghi, is going to prove a very costly mistake.
The correct approach is neither doom and gloom nor sunny optimism but to watch
exactly what they do, what they implement, and react accordingly.
My final comment of the day is that Europe is getting
worse and not better. Whether you
turn your attention to Greece, Spain, Italy, Portugal or even Ireland; it is
getting worse. Nowhere on the Continent are things improving
and even in France and Germany the financial strains are beginning to show. It
is not a question of Euro-bear or Euro-bull; it is just the numbers as they
come rolling out month after month. It is the banks, it is the sovereigns and
grand visions must, in the end, give way to the facts.
“The very powerful and the very stupid have one thing in common. Instead of altering their views to fit the facts, they alter the facts to fit their views... which can be very uncomfortable if you happen to be one of the facts that needs altering.”
-Doctor Who
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