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Europe and Its Confederacy of Dunces |
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Iāve been kind of on the sidelines lately watching the developments in Europe and looking for signs the markets are shaping up. The market was down huge yesterday as Italian bonds are getting clobbered- meaning their short term interest rates are up, and their Governmentās cost of borrowing is way up.
 Iāve always admired the Italians. I donāt believe anyone can dispute the Italians have created many of the finest products in the world. The Italians make some of the finest wines, cars, glass, and fashions found anywhere on Planet Earth.
Italy, the epicenter of the Renaissance, has also created some of the greatest music and art the world has ever seen. This is the country that gave us Michelangelo and Leonardo DaVinci.
As if all that werenāt enough, Italy manages to shut the entire country down for the whole month of August. Everyone, except those in the tourist and service industries, stops working. Impressive. The way the markets have been since 2008, Iām lucky if I get a long weekend.
 And, donāt get me started on the Greeks. Greece is one of the cradles of civilization. The Greeks invented Philosophy and Democracy. Most of the words in the English language can find their roots in ancient Greek.
So, how did these countries with such rich histories get themselves into such a mess? The stories out of Greece and Italy are absolutely trashing the markets now, and yesterday was another example.
Southern Europe is less prosperous and more troubled than Northern Europe, yet they are all bound by one currency. If the Italians and the Greeks could simply allow their currencies to fall dramatically, their goods and services would be more attractive to the rest of the world, and their respective GDPs could grow.
So, why is Europe descending into this giant mess? Well- itās pretty simple, and super complicated at the same time. Let me give you the Readerās Digest version. The Southern European countries are spending more than they are getting in tax revenues (sound familiar?).
Thereās a possibility a number of European countries could actually go bankrupt- metaphorically speaking of course. If youāre bankrupt, you canāt pay your debts. Forget about paying off the debts- you canāt even pay the debt service.
This would have two major and immediate consequences. You wonāt be able to bring in any new loans, so you wonāt be able to support your quasi welfare states, and youāll default on the amount you owe your bond holders.
So- who are these bond holders? They are the major European banks, who would then be improperly capitalized for a bank, and go down the toilet as well. Of course, this would create a run on the banks, and further downward you go.
One way out would be to let your currency devalue dramatically. But, thereās one currency for 17 nations. If the Euro gets clobbered, it would make Italian goods more attractive to International buyers, but the Germans would get less real money for their BMWs. Ouch.
Itās a bit of a mess, and the market responds to the headlines with violent moves one way or the other. The Confederacy of Dunces who are running Europe today are unbelievable. Hereās a little overview for your entertainment.
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The Confederacy of Dunces |
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Meet George Papandreou- the future former Prime Minister of Greece.
 Let me paint you a picture. Youāre deeply in debt, you canāt generate the revenues to either service or pay off your debt.
Your neighbors and business partners donāt want to see you go down the tubes, so they offer to help. They offer to voluntarily cut all your debt in half, then they volunteer to write you a check for $140 billion so you have a little cash to tide you over.
Your neighbors and business partners walk away thinking theyāve done you a great service. I wish I had neighbors and partners like that- my financial life would be a lot easier.
Then, you tell those who have held out their hands and wallets in support that you āWANT TO THINK ABOUT ITā. In fact, you decide to do more than think about it. You decide to have a family gathering of all relatives- aunts, uncles, cousins, and the like get in on it.
Youāre going to organize this family gathering as soon as you can get around to it, and let everyone vote.
This is exactly what the Greek Government decided to do. Instead of reaching for the life preserver, the Greeks want to think about it and have a nationwide referendum while they drown. Insane.
French politician Christian Estrosi nailed it when he was quoted as saying
āI want to tell the Greek Government that when you are in a situation of crisis, and others want to help you, it is insulting to try to save your skin instead of assuming your responsibilitiesā.
I couldnāt have said it better myself. Our political circus would be entertaining if it werenāt so scary, but these bozos take the cake. This is endless material for Saturday Night Live.
Taking the package was the hard thing to do because it came with austerity requirements, but it was the right thing to do. So, of course, the politician whoās heading the Greek Government didnāt have the you-know-whats to take the help because it might not have been popular with their welfare state.
So, Papandreou is now out as a result of his foolish and cowardly action. The Greek government is trying to figure out who is going to replace him, and thereās a lot of carrying on in Greek Parliament. Itās endlessly entertaining if it werenāt so troublesome for the markets.
So, so hereās our next big political winner.
 Enter Silvio Berlusconi- head of the emergency government in Italy. This guy is something. Heās been elected Prime Minister 3 times and fired twice. He would never make it as a politician in the US with the powerful religious right having so much influence.
This guy has already been divorced twice, indicted for embezzlement and tax fraud, and has faced of 50 confidence votes in Parliament since 2008. His most recent exploit happened in January. Italian prosecutors are trying to get him to trial for paying for sex with a 17 year old Morrocan girl- Karina Keyek.
The news is Berlusconi will be out by Sunday, replaced with Mario Monti, a man seen as capable of restoring the national credibility and pushing through the austerity measures the world wants to see.
These are the characters running the European governments, and these are the politicians who are on their way out because they donāt have the political will to do what has to be done to save the European banking system from collapse.
Unlike the US in 2008 where, right or wrong, our government quickly developed a plan to save the banking system and avoid a Depression, Europe has many moving parts from various cultures, all with their own political agendas.
So, what really happened yesterday to cause a rout in the global markets? You wonāt believe how innocent this seems. It is rumored a large Norwegian Oil fund decided to unload its Italian and Greek government bonds.
In the wake of the selling, the Italian 10 year note spiked to a 7.5% yield. The Italians cannot afford to pay more the 5% for funding in 2012. In order to stabilize the markets, the European Central Bank was buying Italian debt in huge quantities. Recently, Italy sold $5 billion in Euros at a 6.087% yield, and there was twice the demand for the bonds that were offered, so the marketās reaction was of course distorted.
It seems to me, while it is dragging out much longer than it would in the US, Europe can eventually implement a plan that will involve reduced spending by governments along with debt forgiveness and stimulus packages.
Donāt let the markets panic you on those violent days. The Europe saga will come out somewhere in the middle- not nearly as bad as the Bears would have you believe, but far from perfect.
It starts with getting rid of the Confederacy of Dunces that run those Southern European countries.
Tomorrow- an update on some of my still favorite stocks Iāve recently covered.
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