Monday, June 18, 2012

Euro Faultlines

  This last weekend there were elections in a number of countries, with Greece and France amongst them. The Greek elections went as hoped, with the pro-bailout New Democracy Party winning. It's likely they're going to be able to form a government with PASOK and other pro-bailout parties. Champagne corks were heard near and far that Greece had saved itself from a terrible and sudden fate. My take is that Greece's timeline may not be sudden, but the terrible fate part is still unavoidable. Greece is going to literally run out of money in a few weeks; it'll be unable to pay Gov't wages. Unless there is a new bailout or a savior, Greece's date with The Keynesian End will come much sooner than they realize. I'm still standing by my prediction Greece will not see 2013 and be in the Euro currency. Today, the German newspaper Die Zeit reports that Chancellor Merkel today has nixed any further aid other than what has been agreed upon and refused to talk about another bailout package. When I was a kid, grandpa and his shotgun took a long walk with an old, sick horse and Valiant did'nt make it back from the walk. The kindest thing Germany could do is what my grandpa did.

  In France, President Hollande got a very nice Fathers Day present from his people in the form of a solid Socialist Party victory in Parliamentary elections. This election could very well have more implications than the Greek elections. It will make Hollande much less agreeable to Chancellor Merkel's approach; it will strengthen the Club Med nations' push to use the ECB as the primary tool to deal with the crisis. It appears that France has decided to align itself with it's Latin cousins and against their German neighbors. Unfortunately for France, this election will result in policies which are certain to hamstring France's economy. Amongst them are measures to punish companies that fire workers, reducing the retirement age, hiring 60,000 teachers and punishing companies that sell factories. These will certainly result in fewer companies starting up in France and a rush of firings before the new law comes into effect. Oh well.. once again Socialists must learn that simply passing laws does not mean that the finances needed for their laws will automatically materialize or that companies will keep their doors open.

  Thanks to the elections in Greece, the markets were expected to have a good day, and indeed started this way. But the Pain in Spain reared it's ugly head in the form of roaring interest rates on their ten year bond-- a sign from the market that the recent bailout is not nearly enough, and they're right. Spain's ten year bond reached 7.28%, though it did finish the day at 7.15%. Most market commentators know that when a nation reaches 7%, the end has come financially. To be sure, Spain reached this plateau months ago and wrestled it down-- and might be able to do so again. My make here is that at some point if this continues, certainly before it reaches 8%, the ECB will have to step in and begin purchases in order to buy time for a reformed bailout. I give it three weeks maximum before the ECB is forced to act. Here's Ambrose's take:

Update Tues 6/19 5am: Spain just held a bond auction, and the results were brutal. A month ago, investors charged Spain 2.98% for 18 month loan. Today it went up to 5.074% for the same loan. That's really bad folks. Thursday Spain is going to sell longer termed debt and I suspect the result will be the same. It appears Spain has hit the wall and is essentially unable to borrow in private markets. A bigger bailout is needed. 


  1. What are your thoughts on Germany also leaving the Euro? I read an interesting piece that postulated that if Germany DOESN'T leave the Euro it will be dragged down into the pit with no recourse, whereas if it gains enough hutzpah to say, "enough" and withdraws it may pay an initial price but would find itself in a far better position in the future.

  2. When the end arrives for the Euro {ie.. when Italy begins to badly slide and France is unable to help} the Germans will up and leave the Euro by agreement with France and Italy. Look for this before the end of 2013.