In what was considered “a make or break” European summit in Brussels, EU leaders in a historic realignment of interests, were able to compromise on a bank bailout plan containing few austerity measures and the provision that banks could be bailed out directly rather than indirectly through the sovereign itself. In this groundbreaking compromise it appears that the EU has taken positive steps in solving its debt crisis by coming to what appears to be a “ free money bailout bonanza” unfortunately, once Europe wakes up to the impossibility of what has been proposed, the disappointment will be monumental.
The most remarkable aspect of this solution is that it’s not new, the world economy celebrated similar victories in October and throughout the past year, all involving the ESFS and more recently the ESM. In theory, if these funds were sufficiently capitalized, there would be cause for celebration. Unfortunately, they are not sufficiently capitalized and therefore there is no cause for celebration. The supposed capitalization of $500 billion is barely enough to cover a bailout of 25 percent of distressed EU debt and in the case of both funds the capitalization is intended to be provided by distressed EU countries. The irony of this “retro” solution is, those intended to fund it, are the very ones who need it. This “ retro” fake solution will disappear once the next phase begins which will involve the funding of the ESFS and the ESM.
It will be a matter of weeks before this solution becomes completely “undone” and it will begin with the extreme conflict over funding considering, Italy and Spain are required to fund 30 percent of the ESM with money they don’t have. The remaining EU countries like France are also broke and will not fulfill any demand to fund the ESM, leaving almost the entire responsibility on Germany. In order for Germany to fulfill a complete bailout of the European Union, it would involve surrendering near 50 percent of their GDP, which in the case of Germany would be economic self destruction and an absolute subordination of sovereign independence to the reckless, irresponsible EU nations for decades. This solution will be rejected to the point of revolution in Germany and if any attempt is made at a referendum, it will result in a rejection of the willful, self destruction of sovereign independence and economic progress.
The market celebration is a result of significant levels of short covering and an expectation of no solution. The short interest which approached record levels resulted in a false rally, since expectations of any solution even a “fake” solution is considered a reason to cover short positions. The instant short interest declines and the details of this plan begin to come undone, we will see this rally end abruptly. Investors will awaken to the insanity of it all and find that we are no further along than we were in October. The parade of distressed countries asking to participate in this “ free money bailout bonanza” will accelerate and it will become obvious through simple math that this bailout is impossible.
Lost In Translation
“Lost In Translation” is a great movie starring Bill Murray and Scarlet Johansson and a very good way to describe the message which was conveyed from Brussels this weekend. It was evident that much of what Merkel has said in the past did not apply to what was conveyed in the decisions of this past weekend. Most likely, the communication from this past weekend was lost in translation. The core of Merkel’s message has always been that any solution would not involve an over burden of German tax payers. This solution not only is an over burden to German tax payers but virtually eliminates the possibility of growth in Germany for decades. The message will become clear as Merkel begins to communicate it to the populace. We will see a very different message coming out of Germany in the next few days as Merkel begins to refute what has been perceived as the German commitment to the EU crisis. The use of a populace referendum in which the people of Germany have the choice, will eliminate the need for Merkel to take a stand and a referendum will result in the deal being struck down by the populace since very few German citizens would willfully give up their sovereign independence and economic freedom to save the European Union. The “lost in translation” message from this week’s summit was more of a plea for more time than an actual solution. The formula was to communicate a message which resulted in a past celebration like the one in October of last year, avoid controversy like Germany imposing severe austerity, never mention the Troika or the treatment of nations like Ireland and Greece and even if the solution is mathematically impossible, at least you could get the markets to rally for a while until people start adding numbers and asking where the money is going to come from. The stall tactic will work for as long as people sleep through the details and dream of a solution. As with anyone who is asleep, morning is always just around the corner. The solution is the absolute and complete economic collapse of the European Union, allowing Europe to rebuild, not just pile bad debt on top of bad debt. The consequences will be less severe, provided the EU and world economy stop sleeping through the realty … morning has arrived and it’s time to be wide awake.