A Great Victory For Windmills

Hangover is when you open your eyes in the morning and wish you hadn't

By Mark J. Grant

There are two countries that are going to give you a whopper of a headache in the coming months. I am leaving Greece to the side for a moment because that country could provide a heart attack and necessitate bypass surgery as the Troika fiddles while Athens burns. I am just waiting to see what is agreed to for Greece and then how the citizens of that country respond but the home of Democracy is not the only place that could ratchet out of control; keep your eyes on Spain and France. Yes, France, while no one has paid particular attention to the antics in Paris and Monsieur Hollande scurries about siding with the troubled nations and advocating a 75% tax burden and leaving Berlin to wallow in schemes of their own making; they are on the verge of getting in real trouble.

“It is better to open your eyes and say you don't understand, than to close your eyes and say you don't believe.”     -The Wizard

 Spain-The Fighting with the Windmills Continues

They have announced that they are going to build their “bad bank” based upon the findings of Oliver Wyman’s stress tests. What we find here is garbage in---garbage out---and a bad bank built upon the garbage dump they have created. Oliver Wyman verified nothing, audited nothing and was paid to sit idly by and accept the data provided by the Spanish banks and the government of Spain. It is good work if you can get it. Then they took the rubbish and constructed complicated economic models based upon them and presented them to the world as factual. What we actually have here is a fairy tale created by the Hermanos Grimm; and the end of the fairytale will be grim indeed if you rely upon their findings. I recall Prime Minister Rajoy’s “A great victory for Europe speech” and I state that the last time Europe had such a victory it was at Waterloo!

Part of the Oliver Wyman presentation touted Spain’s largest bank by assets, Santander, as the unshaken citadel in Madrid. What do we find this morning; profits down 94%, soured earning in the U.K. and Latin America and Real Estate loans that were written down to 65%; or so they claim. I will bet any of you that to achieve even this number that they counted the banos, multiplied them by the empanadas consumed and factored in the rise in the herds of their suckling pigs. Now with property in Spain worth an average of about 40% of what it had been this leaves another 25% to go except that Spain and Oliver Wyman have pulled the usual Southern European trick of informing us that because prices will be higher later that we do not need to worry about the current levels as assets are double booked, contingent liabilities are not counted and Don Quixote has taken over the Parliament once again. If there is an honest politician in Spain he should give a speech; “A great victory for the Windmills.” I would applaud that one!
They say that beauty is in the eye of the beholder, and in my eyes, the finances of Spain are one ugly mess of spoiled tapas.
Spain is facing several regions that may want to secede. They have regional debt that is fifty percent of the nation. Regional governments have now lined up asking for assistance which is more than the total the national government has offered. The EU is trying to force Spain to convert the preference shares of the troubled banks into common stock. The economy in Spain is a sinkhole, their unemployment is the highest in Europe and Germany says they don’t need money because handing capital to Spain has all of the popularity in Germany of handing your soul to the Devil in some Faustian novel. My good friend, Otto Waalkes, is one of the most famous comedians in Germany but I am not sure if even he could get a smile out of Berlin on this matter.Yields are down on Spanish sovereign debt as a result of Mr. Draghi’s “I will save the world” speech but the debt markets are largely closed to the regional borrowers and the municipal borrowers in Spain and the amount of total debt keeps increasing which overtakes the drop in yield by a wide margin. The “Masquerading in Madrid” continues but the time is coming soon when the masks will be removed as Spain is forced into the long line of alms seeking countries.

France---Dancing with Robespierre

Here is the second largest economy in Europe. The land of fashion, elegant cuisine, marvelous wines and an unending supply of Champagne; if you can afford it. However a little investigation reveals that there are little green bugs in the vineyards. France Telecom slashes their dividend this morning. The country decides to back the loans of Peugeot which brings their total loan guarantees to $78 billion which is a figure that is only partially accurate as their assumption of part of the obligations of Dexia could result in a number that is multiples of what is currently known because of the derivatives and guarantees of Dexia that no one, and I mean no one, wants to expose to the public or admit in any manner. It is like so much in Europe these days, brushed under French tapestry until the rot comes bubbling out and infects all of the jovial guests that  are meandering around with their 1966 Chateau Lafayette Rothschild in hand.

“If you wish to be a success in the world, promise everything, deliver nothing.”      -Napoleon Bonaparte

 Apparently Europe has taken his words to heart.