Europe continues to take a page out of Hank Paulson’s “Crisis Combat” booklet, by unveiling one monetary “bazooka” after another. Obviously, EU leaders didn’t notice that Paulson’s “bazooka” completely failed to stop the 2008 Crash.
Even more strangely, they keep pulling out bazooka after bazooka, first unveiling the EFSF which was supposed to raise €1 trillion but failed to raise even €10 billion without having to intervene in its own bond auctions.
Then came the ESM, which was supposed to be another mega-bailout fund, which as before, is having trouble raising funds. After all, if one bailout fund is a dud, why would launching another fix anything?
Oh, and I forgot to mention that both bailout funds will be leveraged… which Europe obviously doesn’t have enough of already (the EU banking system as a whole is leveraged at 26 to 1. Lehman Brothers was at 30-to-1 when it imploded).
Indeed, you don’t even need to look at the math (though the math is impossible and makes the premise of “saving Europe” even more insane) to know that this can’t work. Which is why the idea that the EU as a whole can create mega-bailout funds to put up a “firewall” around its banking system is outright absurd.
The EU is 27 countries. Of these, only 17 use the Euro. And these countries have a long, bloody history of political conflicts with one another. We’ve already seen hints of this with Germany calling Greece a “bottomless hole” to which Greece responded by portraying German politicians as Nazis.
Spain, France, and the others aren’t exactly the best of friends either. And as their respective economies collapse at varying speeds (even Germany posted negative QoQ GDP for 4Q11), political tensions will rise even more rapidly.
So in the end, Europe’s bazookas will be firing blanks (assuming they even can fire at all, which their respective efforts to raise capital call into doubt). Which brings me back to one of my central themes for Europe: that you cannot band together such disparate economies and cultures in one monetary union and expect it to work.
Again, this is common sense. And when we add in the math, it becomes even more clear just how insane these political proposals are.
Consider Germany, for instance. As I’ve noted for months now, that country sports a REAL Debt to GDP of 200% (from former Bundesbank officials’ own admissions) when you include unfunded liabilities. And Germany is somehow going to bailout Italy or Spain (which both sport REAL Debt to GDPs north of 300%)?!?
Again, the whole thing is absurd. The entire European financial system is just one big house of cards, propped up by the hopes that the ECB can hold this thing together.
But it can’t. Europe isn’t the US. And the ECB isn’t the Federal Reserve. What I mean is that you can maybe fool investors into believing that a financial system is fixed if you’re only dealing with one country and one Central Bank. But when you’re dealing with 17+ countries, many of which have their own national Central Banks, and you’re trying to save this system with a larger regional Central Bank (the ECB) the whole thing is impossible.
Indeed, because of its interventions and bond purchases, ¼ of the ECB’s balance sheet is now PIIGS debt AKA totally worthless junk. And the ECB claims it isn’t going to take any losses on these holdings either. No, instead it’s going to roll the losses back onto the shoulders of the individual national Central Banks.
How is that going to work out? The ECB steps in to save the day and stop the bond market from imploding… but the minute it’s clear that losses are coming, it’s going to roll its holdings back onto the specific sovereigns’ balance sheets.
So… PIIGS debt is essentially just a monetary “hot potato” that the various Central Banks in Europe are tossing around? And this is supposed to save Europe? Good luck with that.
On that note, I fully believe the EU is heading into a Crisis in the May-June window of time. We have a confluence of negative factors (monetary, political, technical, etc.) hitting during that window of time, which is unlike anything I’ve ever seen before. And unlike the 2008 Crisis, the Central Banks won’t be able to rein this one in.
Why? Because Europe’s banking system is $46 trillion in size. And the Fed and ECB are already leveraged to the max having spent all their ammunition combating the Crisis this far.
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Graham Summers
Chief Market Strategist
