EU Bonds

One solution that seemed to make sense a couple of months ago was the EU, as a union, issuing bonds, so that those with high rates - like Italy, Greece, Spain and the like - can finance with better rates by financing with those with low rates, like Germany. Well, it seems Germany is starting to run into a smidge of a ripple in rates. Nothing too serious just yet, but bond rates is a confidence business and the minute those buying the bonds get a bit spooked, the rates go up. All this means that the prospect of a EU unified bond sale is becoming more problematic. Obviously, there is still a quantum leap between German rates and say Italian rates, but is seems to me a common EU bond will price toward the negative, like Greece, Italy and Spain, and not toward the positive. The buyers are already getting a bit edgy about Germany and the fact that its banks are heavily exposed to EU sovereign debt.

China seems to be slowing too, which is no big surprise. With its biggest export markets sucking wind and a domestic real estate bubble, hard to believe anything else will happen.

Disclosures: None.

Take Your Medicine

Good things come to those who take their medicince up front and put the problem behind them as quickly as possible. Admittedly, Iceland's problems were so severe it had no other choice, but the fact it is already on the rebound is telling.

http://www.bloomberg.com/news/2011-11-23/iceland-s-outlook-revised-to-stable-by-s-p.html

Mama Needs a New Pair of Shoes!!

We have been waiting, and waiting, and waiting, and waiting for that other EU shoe to drop. Perhaps it is a stylish Italian leather shoe or a spicy Spanish one with big flaps and straps sticking out. Is a French stiletto soon to be in the mix? Ireland isn't known for its shoes and I am pretty sure the same can be said for Greece and Portugal. But somewhere out there is a major shoe about to drop and - pleeeeaaassseee - let go of that sucker already, cause Mama needs a new pair of shoes.

http://www.reuters.com/article/2011/11/21/eurozone-idUSL5E7ML3UK20111121

Pressure is mounting and the chess pieces keep moving but I have yet to hear anyone (who has no direct stake in the game) say that the EU can work this out without some major defaults. It is going to happen . . . I almost hear the wind around a falling shoe shaped object. Yes Spain and Italy - as in the too big to save category - are both seeing unsupportable financing rates on their bond sales. France is facing a possible credit downgrade. New leaders in Greece are not ready to announce good plans yet (like they have one) . . . and on and on.

This side of the pond, the "not so" supercommittee failed to make their recommended cuts - surprise, surprise, surprise!! Seriously, did anyone think that a committee split between Dems and the Dem nots would agree to over a trillion in cuts. Heck, they probably cannot agree on where to order lunch.

http://nbcpolitics.msnbc.msn.com/_news/2011/11/21/8934763-panel-fails-to-cut-deficit-12-trillion

Add in Hank Greenberg (die already) suing the U.S. government for $25 billion over a loser company the U.S. spent way, way too much saving and it really is a nice mess.

http://www.businessweek.com/news/2011-11-21/greenberg-s-starr-sues-u-s-for-25-billion-on-aig-bailout.html

Perhaps China is ready to swoop in and save the day - NOT. Japan is sucking wind and where do you think emerging economies will be when the EU and US are screwed. Yep, I am seeing roses coming up everywhere - especially in New Hampshire in late November.

Disclosures: None.

FAIL ALREADY!!

I for one am tired of all the blah, blah, blah about the EU failing, some of it of course from me as well. It is a story where everyone knows the ending and I am tired of hearing about it, tired of waiting for that magical moment when the cards fall down and, really, really, tired of all the false promises that a fix is in the cards. Shhhhhh... listen in closely . . . . and I will give you a deep, dark secret. Ready? THERE AIN'T NO FREAKIN' FIX.

The PIIGS are toast and everyone knows it. EU has been kicking the can hoping to save the banks, not the PIIGS, but even that is not working. Given the debt loads, they would need to kick the can for another decade just to get past the worst of it. Do you think the governments or voters in the EU countries are willing to wait this long? Are you ready to keep reading about this issue for another decade? I pause for a minute while you chew on this . . . . . . . . . . . . . . (imagine the background track from the last question in Jeopardy playing right now) . . . . . . . . . . (ding!). Your time is up. If you voted more can kicking, leave this blog now and never come back. And beware, natural selection is likely to catch up to you soon. If you voted, let the PIIGS default and deal with it (and the rest of the world deal with it of course), then you have my thanks.

Okay, it will be another major financial meltdown and it will impact all corners (like there are any on a globe) of the Earth, but better to deal with it now than lose a decade or two and then have everyone vociferating (you like it when I use big words) about how we should have pulled the plug earlier. Seriously, default is a bad word, but countries tend to get over it in time. And if your are one of many, you tend to fade to the background.

Sure some big banks in the EU and US and elsewhere will go under or need further government support (I support the former by the way) but there is plenty of capital sitting around on this globe in corporations to weather the storm. Wait another decade, I am not so sure.

So folks, I say pull the trigger, pop the bubble, yank the cord, pull the plug or whatever you catch-phrase seems to be, but let's do our best to let defaults happen, put it behind us, control the damage and move on. There simply is no better choice.

Okay, let me retract on that last statement. If the EU were to be a true union and all the countries joined together for common government financing and they agreed to print the hell out of the euro to devalue it, then maybe the EU could survive without massive defaults. But try to sell this idea to Germany.

Disclosures: None.

All Focus on EU

It is the month of the EU. Sure, anyone with common sense would have focused on the EU problems for a few years now, but things are really starting to percolate. Seriously, Berlusconi and Papandreou both going down in the same month would have been unimaginable a few months ago. And why all the fuss.

Let's break it down. EU countries - focus on the PIIGS - are being required to do Severe austerity plans (that is with a capital S). Severe austerity is not conducive to growth in GDP, reduction in unemployment, or anything of the like, so these plans actually worsen their ability to pay their debts (how smart is that). It is a recipe for several hard years ahead to bring government spending within manageable means. It is a bit of a recipe for disaster as the cure is something that worsens the disease for perhaps a long time. Now I personally agree that austerity is necessary in proper measure and timing, especially for countries on the verge of bankruptcy, but I recognize it is not a cure. The better cure in my book is fessing up, defaulting, going bankrupt, and putting it behind you. Just my take. And by the way, the first ones into the default pool are likely the first ones to come out the other side cleansed of the default negativity. I mean who wants to by bonds of the last country that should default when you can buy bonds of a country that has already cleaned their debt slate. Bond investors care more about the future than the past. Your future ability to pay is all that matters.

And so the EU is still in the struggle, trying to hang on. I have no hope for a good outcome and only question the timing of when the worst will come to bear. Another unanswered question is whether all the kicking of the can has really bought any time for the banks to lower their risk. I suspect a little, but not a lot.

Disclosures: Not.

Finally

On January 1, 2009, among other predictions I noted I expected the U (as in Union) to leave the EU. I got some grief in comments on that post, folks noting I had no understanding of the EU. I admit at the time I did not fully understand the financial underpinnings of the EU and still do not today, but I do understand that the entire structure is not workable. You cannot have this many countries tied together in currency and not have a common governance, if not a common authority over matters financial. You simply cannot have a common currency among countries who are so disparate in their deficits, GDP and other areas. Cannot work.

And so my prediction of now nearly three years ago is perhaps coming to fruition. I do not see the EU disappearing just yet, but I do see it restructuring in the next year or two, with some countries leaving and, perhaps, some countries joining. We will see.

Whatever happens, the EU is toast in the medium term. I say medium as they seem to have titanium tipped boots that can really kick that can down the road. But the can - as Italy with bond rates over 7.5% is seeing, there is just so far you can kick this can.

Again, in my book it is better to do the defaults now and get past the pain as fast as we can. It will happen in time whether we force them to do so now or later. Now I am not good at predicting things (or at least their timing) but I am good at knowing what will happen at the end of the day. And at the end of the day, be it months of years from now, the EU is toast in its current form.

Disclosures: None

Is Greece in or Out

Only time will tell, but we should know in the next month . . .

http://www.ft.com/intl/cms/s/0/992a2cb0-0577-11e1-8eaa-00144feabdc0.html#axzz1cb8DVbTh