Wednesday, June 13, 2012

A Glimmer of Hope

  It appears that in Germany, there is increasing talk of passing something called the "European Redemption Pact", a fund that would be used to pay down excess debt in Eurozone countries. The specifics are that all debts in excess of the Maastrict Treaty limits, which is 60% of GDP and now totals a staggering € 2.3 trillion would be paid by issuing 20 year bonds (guaranteed by all EU nations and vast amounts of gold) and the money raised would be used to pay down these excess debts. The bonds would be paid down by a special EU wide tax.

  Several smaller German parties are on board with this; there is whispers in Berlin that Chancellor Merkel will drop her opposition to this so long as certain conditions are met. Some of this has to do with the other EU Treaty awaiting passage, called the Fiscal Compact, which mandates that EU states balance their budgets and actually has mechanisms in it to enforce this. Several German parties will not pass the Fiscal Compact without including the Redemption Pact. I can see a scenario whereby these two agreements are introduced hand in hand and could pass the various nations' Parliaments. Officials at Germany's Constitutional Court say that these two measures are both constitutional and would likely not be challenged. Passage of these two measures in the Club Med nations would be overwhelming as they would be the beneficiaries. 

  So far, Mrs Merkel's party, the Christian Democrats, are stubbornly against this, and not without reason. But the winds are beginning to change here; there is finally a sense of just how bad things in Europe really are and what a banking collapse would mean for all of Europe's people. Today's Italian Bond auction was absolutely brutal, nevermind it being inherently unfair that Italy has to borrow money at 6.2% and loan it to Spain at 3%. The matter is coming to a head very rapidly.

  The Eurozone Crisis has been festering for three years now with no real solution in sight. The two Pacts-- the Redemption Pact and the Fiscal Compact, enacted in unison, would likely be enough to solve the crisis-- as long as these nations honor their commitments in the Fiscal Compact and balance their budgets. We'll see. But for the first time in a couple of  years, I see a very real solution making progress. Hope springs eternal, no ?

Here is Ambrose's article on this:


  1. I think you are overly optimistic.

    For Germany to do that, strict Budget controls wold have to be in place for ALL nations, entailing giving up most of their sovereignity, and nations would have to have balanced Budgets now, not years down the road.

    Or the debt would continue to be racked up, while the old debt would be in the "Fund". It's like getting a new Visa to pay off Mastercard.

    The types of treaty and constitutional changes you are talking about would take years to enact. and most nations in EUrope are not in favor of that, only Brussels, home to the EUrocRats.

    Events in the real world are moving far too rapidly for this to happen in time, IMHO. It's always good to dream though.

    See Wolf Richter's take today on exactly all this at ZH: "Italy Trembling On The Brink". Another good analyst who always makes sense, like Bruce Krasting.

    1. These nations in debt continue to go deeper in debt because they all spend more than they tax...

      No one is willing to undergo "austerity"..they all want more money for free in order to live the life style they've become "accustom to" and "deserve".

      The real solution is to spend what you take in taxes...not more guarantees that 20 years in the future the debt of the last 20 years will be paid off..all the while running up more debt during the repayment period.

      Either the ECB prints up enough to cover the spending, or the spending more complicated than that.

  2. I have been overly optimistic in the past for sure, and the odds of these being passed by all the Parliaments in time to help Spain are slim indeed.

  3. Mr. Kowalski,

    I continue to love your posts.

    I respectfully suggest the title of this post should be, "A Glimmer of Additional Despair". As every available resource bets the farm, the corrupt continue to thieve, and the blind continue to avert their eyes.

    Humans are certainly consistent in this respect; no consequence = no lesson. Skip a wash day, and dirty clothes pile higher.

    This debt farce may end prematurely at any time. But the longer we go on, the more tears will be shed.

    And afterwards, there will be happiness.

    Thanks again for your time and insight.


  4. Anon you are quite correct everyone wants something for nothing. When times were good and the money flowing no one had issues paying taxes and the government of Greece made promises it can no longer keep. The Greeks didn't save money as they didn't have to. They had cradle to grave promises. Now that TSHTF and the money is gone and most prevalent is that Greeks are notorious for not paying taxes many oldsters will be caught unprepared. This is how things happen and no one should trust government to take care of them. The winds are always changing direction and politicians change with it.