Daily: more on why European bailouts are out and monetisation is in
I’m back from vacation!
The links are light today so let me give you an added few tidbits from this week’s Gold member post on the euro zone. In that post, I wrote that my baseline for the euro zone has become disorderly breakup whereby Greece exits from the euro zone in a disorderly way. The reality is that the political will to support more bailouts has completely dissipated in Germany and other core euro zone countries. They suffer from bailout fatigue.
This issue of bailout fatigue is key. Just last month I wrote a piece, predicting that bailout fatigue will take on increasing political importance in Europe. The German economy is weakening and that will mean less political capital for those favouring bailouts. Moreover, the ratings agency Moody’s has warned Germany that it will soon lose its vaunted AAA rating due to these bailouts. therefore, I believe that given the upcoming general elections, more bailouts are out.
But note this from that article:
Taxpayers will suffer yet again when the dud assets come due from a Greek default or exit. There is no getting around all of this except by shifting the burden away from taxpayers to creditors of private institutions that are affected by their own credit to periphery institutions and governments. The credit writedowns are going to happen one way or another. No matter, bailout fatigue will increase and that means defaults sooner than later.
Also note the following from a February article on the political economy of a Greek default (and euro zone exit):
For the time being, European policy makers must continue down the present path of austerity/non-default defaults because they are deathly afraid of committing policy mistakes given the weak financial sector and high private sector indebtedness. Most importantly, if things go pear-shaped, they know they will be blamed because they have no mandate to break up the euro zone (yet).
Eventually, however, the populace will grant this mandate to break up the euro zone. In the core, bailout fatigue will set in and Greece will come to be seen as expendable even if it means significant costs to prevent contagion and to recapitalise the European financial sector. In the periphery, the deflating economy that accompanies austerity will cause such social unrest that nationalist and extremist politicians will take prominence, giving a green light for a euro zone exit as well. Their mandate will be to throw off the ‘German yoke’ by any means necessary and that means default and/or exit to stop the debt deflationary spiral. Finally, it is clear by now that private sector participation will not be near unanimous. And so the likelihood of ECB participation in writedowns and a credit default swap triggering default will increase over time. To me that means default and exit – come what may.
My view is that the task of heavy lifting to keep the euro together will increasingly fall on private institutions and the ECB. Bailouts are out, defaults and monetisation are in.
I will be revisiting this theme often, so stay tuned.
That’s it. Here are the links.
This speaks both to Australia’s banking sector overvaluation and Europe’s undervaluation. A relative value trade is certainly there. "Given the fact that the Euro crisis is never ending (thanks to a lack of political compromise) it’s unlikely that the timing on this one will be anything remotely similar, but this statistic just jumped out at me as a sign of incredible skew in a large market. It’s food for thought and as always, certainly not an investment recommendation, but a very nice 30,000 foot view of the collapse in European equities during the last few years. The European financial sector is now smaller than Australia’s! Now that has to make you go “hmmmm”"
"Stuart Thomson knew what to do last month as Spanish yields rose to records: Sell German bunds. “There is no way that Germany will not be affected by this,” Thomson, who helps oversee $109 billion as a money manager at Ignis Asset Management in Glasgow, Scotland, said in an Aug. 3 interview. “Spain won’t be able to survive without external help. The bailout will add more burdens on Germany.”"
"Preliminary data from the Cabinet Office on Monday indicated annualised growth of 1.4 per cent between April and June, a significant fall from the revised 5.5 per cent expansion between January and March, and well short of the 2.3 per cent growth rate expected by economists."
Evidence of Germany’s mercantalist economic paradigm is the fact that Germany’s current account surplus will be the world’s largest this year. In terms of rebalancing within the euro area, this is not a good sign.
"Swiss private bank Julius Baer (BAER.VX) is to buy Bank of America’s (BAC.N) Merrill Lynch private bank outside the United States, paying 860 million Swiss francs ($882 million) to boost its assets under management by 40 percent and backing the deal with plans to raise 1.19 billion francs in new capital."