Thursday, March 1, 2012

Europe Hasn't Got It Yet!

The yield on the 10-year bond issued by Portugal jumped by 70 basis points yesterday coming close to a 14 percent yield.

Today, Greek 10-year bonds jumped dramatically to yield more than 38 percent.

Spain’s prime minister begged other officials in the eurozone to ease up on the deficit targets his country is supposed to hit. 

The European Union is being urged to cut the cost of Ireland’s bailout.

800 European banks obtained €530 billion in three-year loans this week from the European Central Bank…up from 523 banks and €489 billion in three-year loans in December 2011.

The head of Germany’s Bundesbank has attacked the president of the European Central Bank, Mario Draghi, over the behavior of the ECB.

France is facing a change in government in the up coming elections.

The European recession continues.

And, protests increase throughout the eurozone.

A system is dysfunctional when the solutions it tries over and over again fail to resolve the problems that are plaguing the system.

One keeps hoping that the pain that the system is feeling will finally become great enough so that the system will try to find a new solution…even if that new system presents a new set of difficulties.

Officials in Europe have continually looked at their situation and provided the diagnosis that their problem is one of liquidity.  Hence, these officials provided more liquidity to their system, first through debt repayment postponements, then through bailouts, then through debt-restructurings, and now through three-year loans to banks to buy time for sovereign nations to get their act in order.

But, the nations that are helped never really deliver. 

Investor’s increasingly believe that Portugal will need a second bail-out.

Ireland is now going to hold a referendum on the fiscal compact of the eurozone.

And, Spain is coming nowhere close to meeting its targets on debt reduction and hence is demanding relief from the targets.

Nothing seems to be holding together. 

So, could it be that maybe…maybe…the problem is one of insolvency and not liquidity?

But, no one likes the I-word.

Liquidity problems can be blamed on that shady crowd of international financial interests and speculators. 

Thus, it is assumed that if sufficient liquidity is provided the markets then this will defeat these “greedy bastards” and everyone can get back to business as usual. 

However if the problem is one of insolvency, this means that the blame must be placed on the governments themselves and the politicians that run these governments. 

But, have you ever seen a politician take the blame for anything?

No standing government will ever take the responsibility for creating a fiscal crisis.  But, that is what we have and until some of these governments are forced to accept the fact that the problems that they are now facing exist because they are insolvent we will get no resolution of the problems.

My best guess is that this stalemate will continue because there are no leaders that will step up and declare that “the Emperor is wearing no clothes.”

European officials will continue to fight the fantasy of illiquidity.  And, they will continue to fight this fantasy even as the recession they are facing worsens.  That is what a dysfunctional system does.

To continue this fantasy, we learn that the International Swaps and Derivatives Association has declared that in the Greek situation there has not been a “credit event” and thus the credit default swaps associated with the Greed debt cannot be exercised.  Where is Walt Disney when you need him?

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