Tuesday, November 23, 2010

For Europe’s Future, Spain Is All That Matters

Last Spring it was Greece that was in crisis mode—then last week, it was Ireland—and coming up next is Portugal—

—but all those pale in comparison to Spain.

That’s gotta hurt.
If I had to bet on which country will bring about the end of the Euro—and perhaps even the end of the European Union—I’d have to say it’s Spain.

Right now, no one is talking about Spain—Spanish spreads are as quiet as a guilty man in a police line-up—everyone’s too concerned over Ireland, and the upcoming Portuguese Situation.

But Spain is the key—Spain is what you should be paying attention to, if you want to find out what will happen to the European Monetary Union (EMU), and the European Union (EU) itself.

First, a recap of last week’s exciting episode of I’m an Insolvent Nation—Get Me Out Of Here!:

Ireland got into trouble with the Euro bond markets after German Chancellor Angela Merkel made some not-very-clever remarks about Irish bond-holders needing to take some haircuts. The bond markets started to panic—yields on Irish debt started to widen—and then once again, it’s Sovereign Debt PanicTime™ (patent pending).

The EU in conjunction with the European Central Bank (ECB) and the International Monetary Fund (IMF) put together a rescue package—but the Irish refused to take it, as they realized they would have to give up some of their hard-won sovereignty in exchange for this lifeline. To accede to this package, they’d likely have to slash government expenditures, take on “austerity measures”, and likely raise their precious 12.5% corporate income tax rate, which has been the carrot the Irish have used to get so much foreign investment over the last decade.

But the Irish deterioration in the bond markets began to pick up speed—finally on Sunday night, after a week of dithering, Irish Prime Minister Brian Cowen officially asked the European Union for a bail out.

(A quick explanation for the layman, as to why the bond markets are so important: Because Ireland is running a deficit, it needs to sell bonds—that is, borrow money—in order to finance its fiscal shortfall. If the bond markets do not have much faith that Ireland will pay back the bonds it emits, then the price of Irish bonds will go lower, which means the yields will go higher. In other words, Ireland will be forced to pay more for the money it is borrowing. The more it has to pay to borrow money, the greater the deficit, until finally, you get to the point where you cannot borrow enough to cover your deficit: In other words, you go broke. This was what was happening to Ireland, in simplified terms.)

Just like they did with Greece, the European officials colossally fucked up the bail-out package for Ireland. It turns out that—far from having put together a detailed package that could be swiftly implemented, and thereby restore confidence—the EU/ECB/IMF troika have only a flimsy framework for the Irish bailout. The vaunted European Financial Stability Facility? It’s not even fully funded yet!

So on Monday, the markets were jubilant—“Ireland is saved! Crisis averted!”—but then today Tuesday, they’re down in the dumps, as it is becoming increasingly clear how unprepared the European officials are. Their “rescue package” is vague on the details—to put it mildly.

Coupled to that, the bail-out announcement sparked a political fire-storm in Ireland—Cowen’s coalition partners, the Green Party, exited the government, and elections are now scheduled for January. There are even calls from Cowen’s own party for his immediate resignation.

This is bad enough—so what does the IMF go and do? Why, with exquisite political tone-deafness, it sends the clear message that Ireland is going to have to crawl if it wants the bail out: John Lipsky, a muckety-muck in the IMF, says to Reuters that “our work there [in Ireland] is technical, not political. Decisions have to be made by [the Irish] government.” In other words, the IMF isn’t going to negotiate with Ireland—it’s going to dictate.

Or in other words, the IMF is saying, Beg for the money, you Irish bitches!

So any effective clean-up of the Irish situation is going to take a while—assuming it actually happens. And just like the Greek bail-out last spring, it will be messy messy messy: Half-measures, dithering, “adjusted” figures, until finally the European officials wind up throwing twice as much money at the problem as originally expected. We might as well call the movie now playing in Dublin, Doin’ It Greek, Part II: Ireland!

To add insult to injury, all this politico-economic theater didn’t staunch what most worried the EU and the ECB: Contagion.

All the smaller, weaker European economies in the EMU are in the same boat as Ireland: They are all insolvent. Not just the PIIGS—Portugal, Ireland, Italy, Greece, and Spain—but also Belgium, and maybe even France, if we steel ourselves and look at the numbers.

Right now, though, contagion has reached Portugal—the next-weakest link in the European Chain:

Portuguese debt yields are widening by about 50 basis point this morning, to 4.328% over the German bunds (10-year)—even after the Portuguese government implemented a second austerity package this past October, following their May spending cuts which did not convince the bond markets.

That’s because the Portuguese have a huge fiscal deficit: 9.4% of GDP. They are cutting spending, and they are raising taxes too—but still, their bond yields are rising: The market doesn’t think that Portugal will make it through this crisis intact. Just like Greece, just like Ireland, the Portuguese will need to be bailed out.

And so that clears the way for the bond market’s anxieties to focus on the real elephant in the drawing room:

Spain.

According to IMF numbers for 2009, the gross domestic product of Greece was $331 billion, Ireland was $221 billion, and Portugal was $233 billion—

—but Spain’s GDP in 2009 was $1.468 trillion. Roughly twice Greece, Ireland and Portugal combined. In other words, close to half of Germany’s GDP.

And what is Spain’s fiscal deficit? Last year, it was officially 7.9% of GDP—twice the EU limit. Not Irish or Portuguese or much less Greek numbers, but still up there—officially.

Why do I say “officially”? And now put “officially” in scare quotes? Because of a very disturbing anonymous paper, released last September 30.

Written by a local economist, it basically said that the Spanish GDP numbers for 2009 were cooked—and then went ahead and showed the whys and hows of this analysis. FT Alphaville originally ran the piece—and it was picked up by everybody, freaking everyone out. But then Alphaville up and retracted the paper under political pressure, excusing their cowardice by saying “life is too short”.

(BTW, something similar happened to me with Henry Blodget’s Business Insider, when I pointed out Paul Krugman was essentially advocating war as a fiscal stimulus solution: They put out my piece, then retracted it like a pussy-whipped house-husband. A lot of blog sites claim they “fearlessly tell the truth”—but when push comes to shove, a lot of the people running these blogs have no balls.)

The anonymous Spanish paper gave a credible analysis, which I for one believe. And considering the shit going on in Greece, regarding faked GDP data—and knowing the Spanish—I wouldn’t be a bit surprised that Spanish GDP figures have been faked in Madrid, in order to keep everything copacetic.

But even if they haven’t been, it’s not as if the official numbers are painting a rosy picture: Spain has nearly 20% unemployment, near 10% yearly fiscal deficit to GDP, and no clear way how to get out of this hole that it is in. So much of Spanish growth over the last decade was fueled by real estate development and over-levaraging, that there’s no clear way forward for the Spanish.

Now, if there is a Greek/Irish-style crisis with Spain—in other words, if there is a run on Spanish debt—how much will the EU/ECB/IMF have to pony up, to bail out Spain?

Let’s look at Greece and Ireland:

Originally it was thought that €45 billion would be enough to bail out Greece—but the final tally for that shindig looks to be something like €90 billion (about $122 billion). At this time, bailing out Ireland is going to come to something similar over the next 3 years—€90 billion—assuming, of course, there aren’t any hidden nightmares in the Irish banking sector, which is the reason Ireland is going under.

In both these cases, essentially three times the yearly deficit was the ballpark figure for the European bailouts.

Therefore, to bail out Spain, and plug up its fiscal balance sheet hole over the next three years would cost €450 billion—minimum. That’s about $600 billion.

Look at that number again—look at it closely, and take your time:

€450 billion.

That’s twice the size of Ireland’s total GDP for 2009.

In order to figure out how much each party would have to shoulder of this €450 billion price tag, Bruce Krasting, in some private e-mail exchanges, thought that the percentages that the EU, the ECB and the IMF were shouldering for the Greek and Irish bailouts could serve as a template.

Fair enough: If we go by Greek and Irish percentages, then roughly a third of that €450 billion price tag to bail out Spain would be shouldered by the IMF—and as everyone knows, the U.S. puts up 20% of IMF money.

So the U.S. would be on the line for €30 billion—$40 billion—to save Spain.

Then Bruce delivered his verdict: “The U.S. is going to say ‘Yes’ to that and ‘No’ to California? No way. Not going to happen with this new Congress.”

BK is one smart customer—I completely agree with his analysis: No way will the U.S. shell out $40 billion to save Spain.

Therefore, the IMF’s participation in a Spanish bail-out will be severely reduced, if not marginal. Therefore, bailing out Spain will be a strictly European affair.

Does Europe have €450 billion to bail out Spain? That is, does Germany have €450 billion to bail out Spain?

No it does not. It does not have the money for such a bailout—and even if it did, it does not have the political will to push through such a bailout.

Period.

But even if—by some monumental financial miracle coupled to an equally monumental political miracle—Europe somehow managed to find the money to bail out Spain without depreciating the Euro?

What then?

The Spanish economy won’t be improving any time soon—and neither will the economies of the other smaller countries like Greece, Ireland, Portugal, Belgium. Not when they’re locked into the Euro, and are therefore unable to depreciate in order to spur growth and investment.

See, even if there is the money and the political will to save Spain—which I don’t believe—the only way to bail out Spain in such a way that it has an economic future is to cut it loose from the Euro. If it is kept locked in the EMU, the Euro will become a weight around its neck, dragging its economy down until in a few years, there will be the need for yet another bail out of Spain. That goes doubly so for the smaller countries, like Greece, Ireland, Portugal, Belgium.

Therefore, I believe that if and when there is a run on Spanish sovereign debt, and Spain slips into the position of having to be bailed out like Greece and Ireland, that will be Crunchtime Europe: That will force an inevitable realignment of the European economy, and the European continent.

Best case?

Though they remain in the European Union, the weaker economies exit the EMU and go back to local currencies, which they quickly depreciate, while their Euro-denominated sovereign debts are restructured and paid off over time. The Euro becomes the currency of France, Germany, Holland, Finland and Austria.

Worst case?

I can imagine a number of worst cases, all of them different, except for one thing in common: They’ll all be bad.

63 comments:

  1. This scenario does not bode well for the States. What happens in Europe, tends to happen here.

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  2. It is happening here. It has been happening here. The biggest difference is Greece and Ireland could not print money. Our government is printing and borrowing 24/7. They are doing this to stave off a collapse. But they are not dealing with the underlying causes so all they are doing is making the inevitable collapse worse. I think they want to push the last few far left laws through the lame duck congress and then they will pull out the props.

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  3. Not sure I agree with this quote

    “The U.S. is going to say ‘Yes’ to that(40 BILLION BAILOUT) and ‘No’ to California? No way. Not going to happen with this new Congress.”

    I suspect when everyone starts to unwrap the counter-party risk that has led to this contagion, they'll be a few contracts in their that may act as "collateral" of some sort.These banks are all interconnected in some regard here.

    Additionally, amidst a global competitive devaluation, perhaps the important question is not "where is the money going to come from?" But which generation is going to be left holding this bag.

    I believe there are 2 principles at work here. One being a global re-balancing of prices and wages as a result of the fall of the iron curtain, the other a demographic imbalance that created a generation of people (Boomers)who took from both sides; their parents and children.

    The credit bubble was a manifestation of this.

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  4. It seems to be that all this is on hold because the approach to x-mas.[for now]
    But for sure will be an interesting saga to watch.

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  5. One of the best articles I read this year explaining Spain's problems is this one

    http://fistfulofeuros.net/afoe/economics-and-demography/how-many-times-can-one-driver-fall-asleep-at-the-same-wheel-and-live/

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  6. I think the EU is putting the minors in a holding pattern. The plan for Spain is completely different and does not involve 'bailing out'.

    They may have to play a second card and get Portugal clear as well, but either way, it will shortly be the U.S. turn at bat again.

    Two houses of cards, one has grease and one has solder.

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  7. Another great piece and so true your comment:
    "A lot of blog sites claim they “fearlessly tell the truth”—but when push comes to shove, a lot of the people running these blogs have no balls."

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  8. There is Dumb. Then there is Stupid. After that there is Dumb and Stupid. Following all of them, there is Dumb, Stupid, Moronic, Idiotic and BRAINLESS BEYOND BELIEF! We passed that one quite some time back here.

    Imagine for a moment you are seriously overdrawn on your Visa Card. You are unemployed, you can’t pay your Mortgage and you are hunkered down waiting for the Sherriff to knock on your door with a Foreclosure Notice.

    Its Sunday Night. The Dreaded KNOCK ON THE DOOR comes! You answer it.

    Its NOT the Sherriff come to Evict You! At your door are a dozen Banksters from your local Wells Fargo Branch, and they DEMAND you ask them for ANOTHER Loan! They won’t take No for an answer! Borrow money from us OR ELSE! LOL.

    This my friends is precisely what is going on in Ireland, to be followed quite soon by Portugal, Italy, Spain… The Irish know they are tapped out, and the Banksters at the door know it too, and in any SANE society, in any SANE economic system of Banking, if the Borrower and Lender BOTH know there is absolutely no hope of paying off a loan, the Bankster won’t offer it, and the lender wouldn’t take it if he did. Not in this society though. The Banksters are going to stick a Gun to the head of the Irish and FORCE them to take another loan, so the Default can be kicked down the road for another day. Take this money OR ELSE! LOL.

    The amazing thing is, at least so far, no matter how indebted anybody is here (long as they are at the TBTF Critical Mass), the Banksters can ALWAYS come up with more money to lend them! That is AMAZING! Where do they GET all that money to loan out anyhow? Of course we know the answer to that, they don’t have it, they conjure it up out of thin air, it doesn’t exist really until the INSTANT the Irish Prime Minister puts his John Hancock on the new loan.

    Now, besides the fact these Banksters show up at your doorstep on Sunday Morning forcing you to take a loan, they ALSO are gonna tell you EXACTLY how you will spend the money they are giving you. The FIRST thing you will do with it is pay the Interest on your Old Loans due to the Bondholders. If you have anything left after that, then you can have a Fire Department or Schools. This would be just like your local Banksters telling you, here, we will loan you some more money, but you can’t use it to feed your kids, you first have to pay your Interest due on the old loans. WTF should I borrow it then? My kids are STILL starving!

    The Banksters are DESPERATE. The moment they can no longer stop pushing out Loans of Money they DO NOT HAVE is the moment the whole ball of wax COLLAPSES. It’s the Naked Emperor moment.

    When the FUCK is some little kid going to walk into the room, POINT at the Banksters and say “You are NAKED! You have NO MONEY!”

    The answer is obvious to this problem. At all levels, from J6P up to the Prime Minister, everybody just has to REFUSE TO SIGN a new indenture contract! Stop taking the damn Loans! The moment this happens, the Illuminati are FINISHED. Its all Smoke and Mirrors. You are not owned by Satan until YOU sign the Contract. DON’T SIGN! That is ALL there is to it. Its right there in the Bible. “Never a Borrower or a Lender Be.” Follow that principle, and Evil will wither from the world forever more. That is ALL it would take. Really.

    RE

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  9. To be continued...

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  10. GL ...

    Is it a foregone conclusion that the German bankers will bail out Portugal?

    The Germans are not idiots - they see exactly where this is going. Surely they realize that Greece, Ireland and Portugal will be back begging for more money in a year or two. This type of lending - to bail out the bond markets of unproductive countries - cannot be sustained. The Germans need to cut their losses now, even if it means subdividing Europe and letting some countries go down the drain. Otherwise the whole of Europe will be dragged into a Great Depression II. Angela Merkel and her cadre of bankers need to make some very hard choices - right now!

    The buck stops when there is a crash in one of the global bond markets. All that's happening right now is that the ECB and the IMF are running around trying to "save the day" by rescuing small economies that are teetering on the brink of extinction. But in turn, all that does is to shift the debt crisis to higher levels - it winds up destabilizing the stronger countries that must back the loans.

    Eventually one of the large sovereigns will fail. It is inevitable ... because major debt holders have all avoided restructuring. The "world financial system" is desperately trying to avoid any players declaring bankruptcy, going through restructuring, and defaulting on some payments. So it cound indeed be Spain that flounders. But it could just as easily be California, or Belgium. Even the Japanese bond market has real risk at this stage - given that the yen is soaring in value and Japan's economic competitiveness is being seriously undermined.

    A collapse in one of the global bond markets will happen - there are just too many weak points in the whole Ponzi scheme.

    PeteCA

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  11. RE, in his comment above, is perfectly right!

    I would go even further. The PIIGS should not only refuse to sign anything, but they should take the initiative.

    They should summon their lenders, mostly French and German bankers, and tell them: "Here is the deal, either you take a 50% cut now, or we default; which one is it?".

    Because it his the borrowers, not the lenders, who hold the cards. Yet, maybe because they are PIIGS, their brain can't process this reality.

    The French and the Germans are bluffing. They only have their big mouth to save their banks, stuffed with hundreds of billions of worthless loans (French banks alone hold 500 billions euros of Italian debt!).

    Bailouts or not, there will be losses. Bailouts, by the way, are ultimately provided by the ECB, because no EU country carries a budget surplus and they all need to borrow in order to finance these bailouts.

    The truth is that the French and the Germans want to transfer their banks' losses, not only to their taxpayers, but also to those of other nations, unfortunate enough to be members of the eurozone.

    Then, there is the case of the UK, which is more than willing to "help" its Irish cousin. Go wonder why...

    And the US which is pushing everybody to enter the great bailout game, its montrous creation, in order to protect its own banks, without having to pay one dollar. I am quite certain that Geithner is on the phone with European leaders 24/7.

    Considering the speed at which currencies are depreciating, much faster than the Roman Denarus in its time, it will be interesting to see how long the bailout game can still go on; not 4 centuries, that is sure!

    Click on my name to visit my blog.

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  12. The U.S may very well say yes to California AND Spain. They'll just issue more treasuries and Bernanke will buy them. Problem solved.

    For now ...

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  13. GL,

    Regarding the Business Insider, keep in mind that Henry Blodget has been very officially invited to the next Davos Forum, a meeting also known as "The largest gathering of gangsters, since Al Capone's daughter's wedding!".

    Henry has jumped ship...

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  14. The pain in Spain
    Will send the Euro
    Down the drain.

    K Smith

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  15. Expect relative dollar strength as the Euro begins to implode.

    Bernanke cannot by himself fight the tidal forces of history.

    In retrospect, the Euro was a poorly thought out currency bloc, and was doomed to failure. All things become clear in retrospect.

    Still, it's not as if Europe's economies will magically recover once they separate from the Euro. And no European nation has an economy large enough to support a global reserve currency.

    Perversely, this ensures the continuation of American Empire for some time, even in the face of oil import weaknesses.

    My advice would be to slowly, but steadily, accumulate gold and silver. They will be the last currencies standing that can act as a reserve currency, but it may take some time to get there.

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  16. "The more it has to pay to borrow money, the greater the deficit, until finally, you get to the point where you cannot borrow enough to cover your deficit"
    ---------------------------------------
    I know you were referring to ireland, but this also applies to America.

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  17. "Perversely, this ensures the continuation of American Empire for some time, even in the face of oil import weaknesses."

    I wouldn't be so sure. If OPEC reprices oil in "a basket of currencies", possibly including gold, the "petro-dollar" is finished. Just because the Euro fails doesn't mean the Chinese have to keep wanting to trade USD's.

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  18. In my smaller euro-area country, some institutions have calculated that our share of the loans to Ireland will increase income taxation by 1%, making tax-levels almost exactly twice what they were during the periods of serfdom in the continent.

    The problem is that the after my country joined the EU, the politicians only care about their little club at Brussels, and the people's voices come a distant second.

    The useless windbags that we call politicians had the incredible chutzpah of claiming that the mountains of money already sent to other countries and now to Ireland is, all of it, for increasing employment back home, not to bail out faceless foreign banks.

    Also, having been to Spain recently (Barcelona & Girona), I have to agree with the assesment that Spain is in trouble, and you can see it in the new, empty buildings that are waiting for residents.

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  19. Hi,

    Do you not think China will come to the aid of Europe and Spain once again? But not until the last minute.

    R

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  20. Gonzalo.. do you have details on the way Correa handled Ecuador's foreign debt.. ie.. how much did he get it reduced by ? Thanks

    http://themeanoldinvestor.blogspot.com/2010/11/irish-misery-and-viva-correa.html

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  21. I think GL forgot China. They'll happily bail Spain out, especially if that means that the weapons-embargo would end.

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  22. It is not the Germany who is in trouble. The Germany is the one who has trade surplus and cash remember?

    As far as the germans are concerned they can write off their international portfolio and still be above water. They still have producing economy. A rich man can lose a mindbogling amount at the tables and shrug and go on with his life. Not so with a professional gambler.

    So if they do that (go home).. London is done, maybe NY as well. Because all they have left is banking and lot of paper indicating investments. I.e. claims to wealth yet to be produced in best case, bets on who goes bankrupt first in worst case.

    So all this is about bailing out the TOP dogs, which Germany reluctantly plays along. For now anyway. Letting their discontent to be known at every step on the way.

    How about that angle?

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  23. Interesting.

    Belgium with debt close to Americans, relative to GDP, could also be the silent car that's about to crash with the motor turned of at 180 km/h running towards a brick wall.

    WHAT DO YOU THINK OF BELGIUM?

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  24. I am a surgeon. This is what it looks like to me: looks just like the victim of multiple and penetrating trauma, parked for months now in the ICU, on life support, tormented by a gang of "experts" (each tweaking the treatment plan as per their own bag of tricks) and overseen by well-meaning staff and anguished family members. The diagnosis? Multiple system organ failure. The prognosis? Dismal. But, as was so beautifully documented on Frontline's program last night, Facing Death, no one wants to give up, especially the patient.

    I've spent enough time in the ICU to know a dying patient when I see one. But I also know from experience that it is quite difficult, near impossible, to predict the end events by reading the monitors and scanning the latest lab results from day to day - let alone envision what the final demise will look like. But often it plays like this: patient crashes, everyone rushes to bedside with all available drugs and devices deployed. This goes on long past the point of death. Finally, everyone is exhausted, all the carts are empty, and someone in charge "calls it" and time of death is officially announced.

    Will Spain take down the EU, or will the IMF (with US help) manufacture another temporizing salve for the enlarging wound? Will China, with its trillions in USD reserves, step into to bail out the IMF? And, in the meantime, what will the scene look like here in America? Are the Irish brave enough to amputate their dead leg politicians to save their own lives?

    We all make rounds many times a day at the bedside of this big, sick, dying patient (global banking cartel.) All the while, the greatest anguish is self-inflicted and all about denial and resistance. Alas.

    My advice: press your black suits. Find your missals. Plan now for a funeral and a burial. Grieve well but not for long, and then begin again.

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  25. Like the article but disagree with one premise:

    BK is one smart customer—I completely agree with his analysis: No way will the U.S. shell out $40 billion to save Spain.

    This discounts the fact that crooked Ben will open swap lines to the ECB, which will in turn be directed to the IMF to bail out everyone, all without Congressional approval. The Fed will happily sit on all those Euros from the swap line indefinitely..why not, theyre current worth more the USD toilet paper.

    So Europe may not be bailed out but it wont be because the US doesnt throw its 20% down the IMF toilet.

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  26. Hi,
    One question that is NOT being asked anywhere is who started all this and why are we THE PEOPLE paying for it. ITS time the banks paid their share in this and if a few go under so what there will always be another to take them over. Again its the victims that are being made to pay for the ills of society. The perpetrators MUST be made to pay instead of getting rich of the backs of us that actually created their wealth.

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  27. Watch your language. It lowers your credibility and makes you look like you don't have a decent vocabulary. Can't you think up another word that doesn't begin with F? Grow up.

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  28. Wrong. the IMF,(US), will pay whatever they have to to whoever they have to for however long they have to. you make the mistake in thinking that our government, no matter if the new or old, gives a Rat's Ass about the American people. the time to act was during the "bloodless coup" of 1913. everyone on the planet will get bailed out except Americans. in January of 2013 they will announce the formation of the World Federation. the 100 year plan will be completed. Obama will be named first president of the world. new world dollars will be exchanged at the rate of 1 new for every 10,000 old. enslavement will be total with no one to stand up to say different. we will have come full circle. America will become a footnote in history. the only hope for humanity is that their arrogance continues to grow.

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  29. No Germans, need to bailout Europe under one condition. Will take over your country, what Hitler failed to do with a barrel of gun, they can do it with Finance....Counqer Europe.

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  30. "far left laws"? What the hell are you talking about? The collectivization of agriculture? The nationalization of private business?

    Get real.

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  31. This story is missing the real story -- the bailout of the bankers. The reason the Irish "need" the money is to make foreign bondholders of Irish banks whole. The reason the Irish have been refusing the money is because they don't want to indebt themselves in perpetuity to bail out the bankers. Much the same thing is happening in Greece etc., where the real reason for the "bailout" is so that banks don't take a loss on their debts.

    The real real reason for all this is that the ECB doesn't have an established mechanism for supporting the euro's value in the event of default and turmoil. The method is easy: reduce base money by selling bonds in the open market. This is the proper way to support a currency's value. If the ECB had mastered this method, then they could have default and bank receivership, and it wouldn't have any great currency effects.

    www.newworldeconomics.com/archives/2010/112110.html

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  32. Great post on the European economic situation, and how things are getting progressively worse...

    (Spain Spain, go away, come again another day)

    ...before any hope of them getting better (i.e. the dismantling of the European Union). Worth reading.
    ...
    (However, the greater fear is what will end up replacing the EU).

    I think South America or South East Asia are the better places to be for the next decade or so.

    www.gavrielshaw.com

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  33. Interesting blog, although it is rather superficial and lacks sufficient knowledge of Europe, the EU, the EMU, the Euro as well as the countries involved. I´m afraid Europe is rather complex and puzzling, especially for northamericans.

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  34. Interesting indeed, Russian roulette with six bullets in the chamber, better than dying a slow death I suppose, I think our surgeon friend had it right, press your black suits, and practice lifting many a coffin,( did I say war ) no I was just thinking out loud sorry, a freudian slip.

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  35. GL, almost at the end of the article you said: "they’re locked into the Euro, and are therefore unable to depreciate in order to spur growth and investment."

    Were you trying to pull a fast one on your readers, inserting some Keynesian tomfoolery for fun, or just trying to see if people were still paying attention by the time they got to page seven?

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  36. Beau-ti-ful! And why don't Self-Important Politicians realize this truth? Because they are Themselves . . . slaves! Wait-a-minute buckaroo--what are you saying? They are bound by SIN. They are captives of . . . the Devil. II Timothy 2:26 Thus they cannot help but err.

    Deliverance, rescue, and escape is in CHRIST alone.

    UNJUST WEIGHTS are ABOMINATION to the LORD GOD. Therefore the whole worlds’ monetary system is . . . abominable. Which is one reason why it is failing so miserably. The other reason it’s failing so disgustingly is because . . . that's what its DESIGNED to do!

    Think not? The whole world lays in the lap of the wicked one—the devil. Who do you think are his most highly favored servants? Would it have anything to do with money?

    Then it is the hidden bankers, the one’s we NEVER see, who have been dealing these rotting cards for CENTURIES. HA! Christ Reigns! HA! He has Conquered Death! HA! Rejoice I say!

    Will sound money ever be available in this world again? Yes—but not before it gets worse. Look to the prophesies of the Holy Bible if you want to know what’s coming. Revelation 13:16,17 and Revelation 14:9-11.

    Most Important--NEVER take the “Mark of the Beast” prophesied about in the above referenced verses. Unbelief is disobedience, saith the Lord. ONE is coming who will force ALL to take a mark on their hand or forehead. But if any man receive that mark, the same shall drink of the wrath of God, and shall be tormented forever.

    But whosoever shall call on the name of the Lord shall be saved. BE YE THEN BORN AGAIN, not of corruptible seed, but of incorruptible, by the word of God, which liveth and abideth forever. Romans 10:13 & 1st Peter 1:23

    MarkMyWordsPublishing.com

    ReplyDelete
  37. Your unfortunate use of foul language prevents my being able to forward this post to others, which i would have liked to be able to do for friends who are not up-to-speed on these topics. It really was an excellent summary of how we got in this mess, although the truth is that nobody has a clue regarding where this quagmire leads.

    I am concerned that this crisis might be by design. The desire of George Soros and his ilk to collapse currencies and societies and remake them in his own image is what concerns me most. What if our demand that our governments punish the banksters is the triggering mechanism they hope for, the event that will push everything over the edge?

    9

    ReplyDelete
  38. Pray tell............with all this turmoil, who behind the curtains is now collecting using the various stage puppets on attached strings. All this today by way of Polically encouraged bank de-regulation in the late nineties across the West to produce the infinite promise........products like CDS " gaurantees" etc etc. The whole universe does not contain enough carbon to produce the paper to print the resultant encashment of these fantastic financial instruments. The only route will be the "evolvement" or "creation" of new currencies. And much fewer of them. And then off we go again. Those behind the curtains will continue to collect their MASSIVE debt interests from the world's tax payers in a "NEW" stable financial environment. There has to be much much more econmic fear and distress I think in the pipeline to soften the various nationalities up and drop their patriotic allegiances in order to survive and hence be willing to accept almost anything that provides security. I am not a conspiracy theorist but do fervently believe that as ever in the past to control the people either is with weapons or with what they purchase their bread.......coins or rare metals or sand.........and if it can be transferred down glass fibres......all the more efficient.

    ReplyDelete
  39. I don't think any country will have to cough up for the bailout - none of them have that sort of money.
    The EU and EMU will just print it, and hand it out, "QE Euro style". It's the countries that hold Euro reserves that will yell and screams. I expect Germany to dump the Euro and revert back to the Mark.

    ReplyDelete
  40. I would have preferred the article without the profanity. That diluted the article.

    ReplyDelete
  41. What’s the big deal with all the complaints about profanity in GL blogs?

    It’s not like I let my kids read this material.

    I read this blog because of the wit, style of writing, honesty, and the no bullshit approach.

    If you want sanitized literary stimulation, and are easily offended, then stick to the Bible, or Oprah, s magazine.

    GL, good read as usual.

    One comment above stated: Europe is complex and not easily understood.
    Europe has been around for a long time, and will come through this fiscal emergency in time.

    ReplyDelete
  42. "Stick to the Bible if you don't want to be offended?" Andy, you must not have read the Bible lately.

    MarkMyWordsPublishing.com

    ReplyDelete
  43. A Germany on the Mark has a currency worth more than the Euro. This destroys German exporters in a country totally dependent on exports. Politically it may mean Europe unites against Germany as well, as has happened before, which may mean tariffs - again destroying German exporters.

    Germany's weaknesses as an export dependent county with an insolvent banking sector will be exposed quickly should the EU fail.

    A side bar to a weaker Euro will mean a stronger dollar as the US tries to export its way to prosperity.

    ReplyDelete
  44. So Gonzalo, tell me, how does a cascading collapse of the European Ponzi affect your predictions of a hyperinflation of the Dollar? Its gonna be mighty hard to hyperinflate the dollar if the confidence is lost in the Euro first, no?

    Race to the bottom dude, credit collapse and deflation are the driving factors, not inflation.

    RE

    ReplyDelete
  45. If you are concerned about the language just highlight it and paste it into a word-oproceeser format, censor the offensive language and then pass it on with a link and a warning. This stuff is too important to ingnore based on some prissy assessment of "proper" usage.

    I have been quietly accumulating PMs for some time now based on GL's insights. If/when hyperinflation hits I will be able to take care of my family, would you put off warning/helping your friends due to some offensive words?

    Really?

    ReplyDelete
  46. "Its right there in the Bible. 'Never a Borrower or a Lender Be.'”

    I believe that was Shakespeare in Hamlet... But the rest of your post was right on. Refuse the loans, make Ireland Irish today.

    ReplyDelete
  47. Hmmm...
    How will the US inflate away a meaningful amount of it's debt if an ongoing Euro crisis keeps driving the dollar back up (or at least arresting it's fall)?

    ReplyDelete
  48. I´ve read all the comments posted on the Spanish economy and some do worry me I must say. I´ve been living here for over 27 years. The problem is the socialist way of governing. Greece, Portugal, Spain under the socialist system - their policies are continually based on favouritism, squandering in useless programs giving contracts to friends and party affiliates, control of the judicial system, the police and above all, the educational system used to endoctrinate the young minds in perversity and homosexuality from the age of five and six. SEven years ago, this government got into power after the massacre of 192 people in a terrorist attack. They were not prepared to govern as the survey favoured the conservatives. There was a decent surplus in 2004. In no time, they delipated all the funds and fell into debt. The President has no intention of making a single move to alleviate the situation and is only playing for time until the general elections in 2012 The have paid off 430 billion euros to buy the support of the Basque nationalist in the 2011 budget. His obsession is power. Nobody else matters. In my opinion, he will bring down Spain even further and inevitably will do the same to Europe and the euro. But please don´t blame the Spaniards. 80% of the population has been fed up with this president for two years now. He´s simply not giving up. Most of us know what is behind his deision. But we dare not say a word.

    ReplyDelete
  49. En españa estamos a punto de explotar.
    20% de la poblacion parada, eso en las cifras oficiales así que en realidad será un 30%.
    Casas que valen 300000eur , salarios de 1000eur.

    Tengo amigos con hipotecas a 35 años.
    Impuestos abusivos.
    En fin un coctel perfecto para que explote.
    Dios nos ayude.
    Ernesto
    desde Salamanca, Spain.

    ReplyDelete
  50. Kevinhofsas: I prefer books on Fact rather than Fiction.

    However, i would challenge that there are no words of profanity in the Bible, if you disagree, then please post some examples.

    ReplyDelete
  51. So I hope you are all finally getting it, that it is, and has always been about the banks. What is happening in Euroland is exactly what is happening in the US. Look where all the stimulas money has gone and who is getting the bill.

    ReplyDelete
  52. @ ernesto: la cosa va a explotar, pero España desgraciadamente va ser nombrado como "causante" de la crisis total en europa - aun que solo representa una parte del problema.

    ______________________________________________

    long story short: Spain is too big to bail, Italy will fall afterwards, then it's over for Europe.

    Considering Germany: Their banks are insolvent cause they lent all the trade surpluses to the countries now in trouble.
    They need a currency reform badly.

    Gold will remonetize.

    ReplyDelete
  53. The results of yesterday's by-election in Ireland are currently being counted. With 50% of the results in, the government has got 20%, down from 50% in the last election. The constituency has historically been very FF, the governing party. So, if they were to experience the same result, a decline in their vote of 60%, nationally at the next election, they'll be out of power for a generation.
    Apart from satisfaction, this is important because whatever they do between now and January's general election has no credibility/moral standing. The EU are trying to force compliance before that election as though whatever the current government agrees will be somehow legally binding. In reality of course, we're not dealing with an individual who can be forced to sign at gunpoint, but with a sovereign entity. By that I mean that whatever the current pretence, the only people with an army and a printing press in Ireland are the government. The official result won't be released until this evening, probably delayed until the markets close. It will be interesting to see how the markets digest it.

    ReplyDelete
  54. "Most of us know what is behind his de[c]ision. But we dare not say a word."

    Coming soon to a political theatre near you.

    ReplyDelete
  55. I only recently discovered you, but you are already in my selected, must read, bookmarks. Your analysis are excellent, sharp like the tip of a spear, and I read a lot of analysis...

    ReplyDelete
  56. Great article as well as some of the comments. As my father told me, at the end of the day we are only responsible for our own actions and situations. He also told me to live below my means and invest the difference for the bad times ahead.
    .
    It seems to me that our power hungry government leaders are getting disparate. To understand them and where they get their power is to know that they will keep printing money until a catastrophic event stops them. They have figured out that if they all do it, then they will postpone that event. The logic being that no country can go rouge and do the right thing. With their mouths they say different, but each one is jockeying for position by lowering the value of their currency to be more worldwide competitive.
    .
    So, if every country is just printing more money how is that going to affect our lives? Some say inflation, some say deflation. Both sides are right in a way. It is complicated but it seems to me that each currency will buy less of things that are in a finite quantity or are needed in higher quantities than can readily be made available. In other words those things that an over populated world will pay any price for.
    .
    What comes to mind? Starting with water, food, oil, coal, natural gas, rare minerals, timber, property near jobs, guns, etc. Then of course there is the stores of wealth, gold and silver and other precious metals. Any product that is labor intensive will deflate as wages drop around the world but the things I mentioned above will tend to go up in currency terms. Whomever is controlling those high demand, difficult replacement items can use their increasing value to buy more labor intensive items.
    .
    To accomplish this we have one of the greatest inventions of the 20th century. ETFs. By analyzing and weighing a basket of ETFs we can catch and participate in the materials and industries producing these materials. Just using say a 39 week moving average to get in and a 80 week moving average to get out, we can usually be in the strongest movers at the time. I call it the macro and micro double punch knock out. Access the big picture to narrow down to the right asset classes, then use the immediate term trends to be in the better ones at any point in time.
    .
    Friends, we are in a dangerous world. I can see the end of times coming more every day. The news media is corrupt as well as our government leaders and even our great business leaders. Their power over our lives and minds is growing and we are like the frog with them turning up the heat day by day. The masses will stay in the water till their end. Maybe we can't get out of their pot but we can crawl to the sides and be there when the pot explodes. Maybe we can get thrown clear of the boiling water.
    .
    Think about where your income is coming from. What can you do to better secure it in under these economic realities. Get more value for your money which often means less things. Invest knowing that this worldwide ponzi scheme is at work. Do what you can and leave the rest to God. Put your faith in God as his day is soon coming. The devil is clearly in charge now and having his way with us.

    ReplyDelete
  57. Great article as well as some of the comments. As my father told me, at the end of the day we are only responsible for our own actions and situations. He also told me to live below my means and invest the difference for the bad times ahead.
    .
    It seems to me that our power hungry government leaders are getting disparate. To understand them and where they get their power is to know that they will keep printing money until a catastrophic event stops them. They have figured out that if they all do it, then they will postpone that event. The logic being that no country can go rouge and do the right thing. With their mouths they say different, but each one is jockeying for position by lowering the value of their currency to be more worldwide competitive.
    .
    So, if every country is just printing more money how is that going to affect our lives? Some say inflation, some say deflation. Both sides are right in a way. It is complicated but it seems to me that each currency will buy less of things that are in a finite quantity or are needed in higher quantities than can readily be made available. In other words those things that an over populated world will pay any price for.
    .
    What comes to mind? Starting with water, food, oil, coal, natural gas, rare minerals, timber, property near jobs, guns, etc. Then of course there is the stores of wealth, gold and silver and other precious metals. Any product that is labor intensive will deflate as wages drop around the world but the things I mentioned above will tend to go up in currency terms. Whomever is controlling those high demand, difficult replacement items can use their increasing value to buy more labor intensive items.
    .
    To accomplish this we have one of the greatest inventions of the 20th century. ETFs. By analyzing and weighing a basket of ETFs we can catch and participate in the materials and industries producing these materials. Just using say a 39 week moving average to get in and a 80 week moving average to get out, we can usually be in the strongest movers at the time. I call it the macro and micro double punch knock out. Access the big picture to narrow down to the right asset classes, then use the immediate term trends to be in the better ones at any point in time.
    .
    Friends, we are in a dangerous world. I can see the end of times coming more every day. The news media is corrupt as well as our government leaders and even our great business leaders. Their power over our lives and minds is growing and we are like the frog with them turning up the heat day by day. The masses will stay in the water till their end. Maybe we can't get out of their pot but we can crawl to the sides and be there when the pot explodes. Maybe we can get thrown clear of the boiling water.
    .
    Think about where your income is coming from. What can you do to better secure it in under these economic realities. Get more value for your money which often means less things. Invest knowing that this worldwide ponzi scheme is at work. Do what you can and leave the rest to God. Put your faith in God as his day is soon coming. The devil is clearly in charge now and having his way with us.

    ReplyDelete
  58. Did anyone notice, in the 'very disturbing anonymous paper', that the U.S U/GDP ratio was 1.80? That's 58% of Spain's ratio, and 3.9 times the next highest ratio in the table. In other words, way out of line.

    I know the U.S. unemployment number has been skewed lower for years, and is probably low here as well. So you don't suppose our current open administration has been cooking the GDP numbers as well, do you?

    ReplyDelete
  59. Fiscal irresponsibility, fraud, lies, the underpinnings of our modern systems. If people were more honest and hardworking (like Norway) they wouldn't cause such ridiculous messes.

    ReplyDelete
  60. The best case scenario is for Germany to leave the Euro and let everyone else stay in. The "problem" with the Euro is that Germany is too productive and too fiscally disciplined. If you have a classroom of 13 kids and one student is learning more quickly than the rest, what do you do? Do you incrementally hold back students so the one star student continues to learn at his/her level? No, the solution is to kick out the star student (let him skip a grade or go to a special class I guess) for the benefit of the other 12 students.

    Once a few more EU countries waver, the writing will be on the wall: One day Germany will be the only country left on the Euro, so why not dismantle the currency in an organized fashion? The Euro can't depreciate in a meaningful way as long as the Germany is part of it. Sure, the Euro loses a lot of heft without Germany but isn't that better than going back to pesetas, drachma's, etc?

    ReplyDelete
  61. GL,
    By far the best article I have read attempting to explain the EU crisis. I certainly understand the entire situation better and very much appreciate your candor and realistic evaluations of the situation. I can only hope that the Congress will be as realistic when the time comes to pony up and help the IMF. I made a 15+% profit betting against the Euro earlier this year (EUO) and have placed a similar bet recently. I don't see how the Euro can prosper despite the pathetic USD. Thanks again for the great article.

    ReplyDelete
  62. Terrific argument. This is going to run and run. The UK is caught in the middle, commmitted to euro stability even though not a member. This requires big funding commitments for which the coalition government have no authority. Ireland though is a special case, since they made a serious mistake in leaving the sterling area for that of the Bundesbank ! This is ancient history though...

    ReplyDelete
  63. Your analysis are excellent, sharp like the tip of a spear, and I read a lot of analysis...

    ReplyDelete

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