This is the name of the restaurant at the end of Europe; the Palace of the Wizard. This is where I sit and watch the long story unfold until the day when the folding stops and the fabric tears. After almost forty years on Wall Street I understand both the joke and the punchline and you cannot pay off old debt with vastly greater amounts of new debt without consequences and, I assure you, there will be consequences. This paradigm does not work for a corporation or a sovereign nation and the borrower is eventually brought to his knees by the sheer weight of the debt that he has laden upon his back. The interest rate paid is only part of the equation with the rest being the absolute size of what is undertaken.
Germany, with a GDP of $3.55 trillion cannot hope, in any terms, to support a European construct that is over $15.2 trillion without the hammer of fiscal reality at some point whacking her backside with a very loud bang. The remaining economically sound nations of the Netherlands, Austria, and Finland also do not have the capacity or the desire, according to the Prime Minister of the Netherlands and the Finance Minister of Austria, to support the rest of the Continent that is sliding into the pit of fiscal morass. “No more money for other nations” is the hoot and the holler resounding from Vienna to Amsterdam.
The ECB, who resolutely tied their own hands and rather firmly behind their back, will do nothing, which is their own condition of liability, without a nations asking for help and receiving it and being given the green light from a Europe that grows more reluctant with each passing day. The European Central Bank’s recent announcement was not Nirvana but a last ditch dug side by side with the last hole if it gets to it and if the political leaders of Europe decide that the twin foxholes must be used to protect and shield the Continent. It is not “unlimited” or “no cap” that are really the operative words for the scheme but the “condition” of use that is the most important part of the recent “Save the World” speech of Mario Draghi. Europe and the IMF have spun the speech and I smile and watch it go round but it is the “Condition” that is important regardless of the way the top is turned in the blistering heat of the European crisis.
“I was to learn later in life that we tend to meet any new situation by reorganizing; and a wonderful method it can be for creating the illusion of progress while producing confusion, inefficiency, and demoralization.”
-PetroniusThe Euro and the equity markets rally upon misperception and I have witnessed this many, many times before in all kinds of different circumstances and then the light dawns and the great fizzle begins. The European banks stress tests were a failure and the markets initially rallied upon their announcement. The grand Firewalls were a failure and the markets rallied upon their declaration. Now we have the next “nouveau cuisine” and the flop in the pan will soon be realized for what it is; French Fries parading as “Pommes Frites” but the oil used to fry them is stale from constant usage. Allow me to be repetitive; the ECB has told us they will do nothing, nothing without formal application for aid and without all of the European nations agreeing as all twenty-seven countries own part of the ECB and not just the predominant seventeen so often discussed. They have also exempted Greece, Portugal, Ireland and Cyprus from any assistance and so the only nations under discussion are Spain, Italy and possibly France. In fact, what the ECB has done by lowering the yields on sovereign debt of these troubled countries is exactly the opposite of what should have been done as they can limp on a little longer now and try to avoid the yoke of fiscal responsibility while doing so.
“It is dangerous to let the public behind the scenes. They are easily disillusioned and then they are angry with you, for it was the illusion they loved.”-W. Somerset Maugham
Spain is an admitted user of “dynamic provisioning” which is a long and academic argument for shifting reserves but in the end it means but one thing and one thing only and that is they are admittedly fiddling with their books. Spain is scared to death of the “Obermeisters of the Troika,” the refrains of the three brothers Reich, that will show up in Madrid and demand explanation and sacrifice. The financial windmills will be scrutinized and termed what they are and not accepted for what they have so long been presented as which is a myth created by Don Quixote and carried on by Mr. Rajoy and his predecessors. The rain in Spain has been useful for keeping the plains from the accuracies of the sun drenched light. Spain will take the money and all they can get without conditions but that possibility was ended by the ECB in another unforeseen and unintended consequence of the ECB’s decision. The European Central Bank closed the loophole with the condition for their assistance and Spain is now twisting in the winds of the tact the European Central Bank has signed up for and pledged allegiance.
The limit of the “unlimited” and the cap of the “no cap” is clearly defined in the condition. Any nation must apply for aid to the Stabilization Funds of the European Union and it then must be granted by all twenty-seven nations that own the ECB and not one Euro’s worth of bonds will be bought by the ECB until this process has taken place and been approved. The timeline here is not weeks but months and any decision will rest firmly upon the fact finding of the Troika which will be called in to assess and report to their Masters. I assert, regardless of the current misconception, that there is a cap and there is a limit and both are narrowly defined.
“In my youth, I, too, entertained some illusions; but I soon recovered from them. The great orators who rule the assemblies by the brilliancy of their eloquence are in general men of the most mediocre political talents: they should not be opposed in their own way; for they have always more noisy words at command than you. Their eloquence should be opposed by a serious and logical argument; their strength lies in vagueness; they should be brought back to the reality of facts; practical arguments destroy them. In the council, there were men possessed of much more eloquence than I was: I always defeated them by this simple argument; two and two makes four.”-Napoleon
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