Best of the Week
Most Popular
1. Dollargeddon - Gold Price to Soar Above $6,000 - P_Radomski_CFA
2.Is Gold Price On Verge Of A Bottom, See For Yourself - Chris_Vermeulen
3.Dow Stock Market Trend Forecast 2018 - Nadeem_Walayat
4.Gold Price to Plunge Below $1000 - Key Factors for Gold & Silver Investors - P_Radomski_CFA
5.Why The Uranium Price Must Go Up - Richard_Mills
6.Dow Stock Market Trend Forecast 2018 - Video - Nadeem_Walayat
7.Jim Rogers on Gold, Silver, Bitcoin and Blockchain’s “Spectacular Future” - GoldCore
8.More Signs That the Stock Market Will Rally Until 2019 - Troy_Bombardia
9.It's Time for A New Economic Strategy in Turkey - Steve_H_Hanke
10.Fiat Currency Inflation, And Collapse Insurance - Raymond_Matison
Last 7 days
Gold / US Dollar Inverse Trend Relationship Video - 23rd Sep 18
US and Global Stocks, Commodities, Precious Metals and the ‘Anti-USD’ Trade - 23rd Sep 18
Gerald Celente Warns Fed May Bring Down the Economy, Crash Markets - 23rd Sep 18
Top 3 Side Jobs for Day Traders - 23rd Sep 18
Gold Exodus to Reverse - 22nd Sep 18
Bitcoin Trader SCAM WARNING - Peter Jones, Dragons Den Fake Facebook Ads - 22nd Sep 18
China Is Building the World’s Largest Innovation Economy - 21st Sep 18
How Can New Companies Succeed in the Overcrowded Online Gambling Market? - 21st Sep 18
Golden Sunsets in the Land of U.S. Dollar Hegemony - 20th Sep 18
5 Things to Keep in Mind When Buying a Luxury Car in Dubai - 20th Sep 18
Gold Price Seasonal Trend Analysis - Video - 20th Sep 18
The Stealth Reason Why the Stock Market Keeps On Rising - 20th Sep 18
Sheffield School Applications Crisis Eased by New Secondary Schools Places - 20th Sep 18
Precious Metals Sector: It’s 2013 All Over Again - 19th Sep 18
US Dollar Head & Shoulders Triggered. What's Next? - 19th Sep 18
Prepare for the Stock Market’s Volatility to Increase - 19th Sep 18
The Beginning of the End of the Dollar - 19th Sep 18
Land Rover Discovery Sport 'Approved Used' Bad Paint Job - Inchcape Chester - 19th Sep 18
Are Technology and FANG Stocks Bottoming? - 18th Sep 18
Predictive Trading Model Suggests Falling Stock Prices During US Elections - 18th Sep 18
Lehman Brothers Financial Collapse - Ten Years Later - 18th Sep 18
Financial Crisis Markets Reality Check Now in Progress - 18th Sep 18
Gold’s Ultimate Confirmation - 18th Sep 18
Omanization: a 20-year Process to Fight Volatile Oil Prices  - 18th Sep 18
Sheffield Best Secondary Schools Rankings and Trend Trajectory for Applications 2018 - 18th Sep 18
Gold / US Dollar Inverse Correlation - 17th Sep 18
The Apple Story - Trump Tariffs Penalize US Multinationals - 17th Sep 18
Wall Street Created Financial Crash Catastrophe Ten Years Later - 17th Sep 18
Trade Wars Are Going To Crash This Stock Market - 17th Sep 18
Why Is Apple Giving This Tiny Stock A $900 Million Opportunity? - 17th Sep 18
Financial Markets Macro/Micro View: Waves and Cycles - 17th Sep 18
Stock Market Bulls Prevail – for Now! - 17th Sep 18
GBPUSD Set to Explode Higher - 17th Sep 18
The China Threat - Global Crisis Hot Spots & Pressure Points - 17th Sep 18 - Jim_Willie_CB
Silver's Relationship with Gold Reaching Historical Extremes - 16th Sep 18
Emerging Markets to Follow and Those to Avoid - 16th Sep 18
Investing - Look at the Facts to Find the Truth - 16th Sep 18
Gold Stocks Forced Capitulation - 15th Sep 18
Hindenburg Omen & Consumer Confidence: More Signs of Stock Market Trouble in 2019 - 15th Sep 18
Trading The Global Future - Bad Consequences - 15th Sep 18
Central Banks Have Gone Rogue, Putting Us All at Risk - 15th Sep 18
Gold Price Seasonal Trend Analysis - 14th Sep 18
Growing Number of Small Businesses Opening – and Closing – In the UK - 14th Sep 18
Gold Price Trend Analysis - Video - 14th Sep 18
Esports Is Exploding—Here’s 3 Best Stocks to Profit From - 13th Sep 18
The Four Steel Men Behind Trump’s Trade War - 13th Sep 18
How Trump Tariffs Could Double America’s Trade Losses - 13th Sep 18
Next Financial Crisis Is Already Here! John Lewis 99% Profits CRASH - Retail Sector Collapse - 13th Sep 18
Trading Cryptocurrencies: To Win, You Must Know Where You're Wrong - 13th Sep 18
Gold, Silver, and USD Index - Three Important “Nothings” - 13th Sep 18
Precious Metals Sector On a Long-term SELL Signal - 13th Sep 18
Does Gambling Regulation Work - A Case Study - 13th Sep 18
The Ritual Burial of the US Constitution - 12th Sep 18
Stock Market Final Probe Higher ... Then the PANIC! - 12th Sep 18
Gold Nuggets And Silver Bullets - 12th Sep 18
Bitcoin Trading - SEC Strikes Again - 12th Sep 18

Market Oracle FREE Newsletter

Trading Any Market

What Happened To The Debt?

Interest-Rates / Eurozone Debt Crisis Aug 22, 2012 - 12:10 PM GMT

By: Raul_I_Meijer

Interest-Rates

Best Financial Markets Analysis ArticleAlright, OK, so we have new sorts of relative highs in European and US stock markets, even as we keep a w(e)ary eye on Shanghai's new lows. The western highs seem to have a lot to do with all kinds of expectations of ECB sovereign bond purchases and/or cooling German resistance against them.


All this is accompanied by a rising Euro, and that little detail is far more puzzling than is generally acknowledged. Because there is only one reason for the ECB, with perhaps Angela Merkel and the Bundesbank chiming in, to even consider such measures as more - PIIGS - bond buying, that are tremendously unpopular among a broad swath of Europeans. That reason is that the PIIGS countries, and Greece, Spain and Italy in particular, are doing much worse than anyone wishes to admit in public.

Thus, we have a substantial part of the Eurozone sinking deeper fast than anyone will tell you, while at the same time the currency they use is rising. A rise based on expectations of other Eurozone nations, notably Germany, basically putting up the health of their own economies as collateral to inspire confidence in ECB sovereign bond purchases. Now, you can play this game for a while, no reason to doubt that. But I would personally think we've finished playing out that particular "while" a long time ago and running. Whatever remains now is but a wager. As in: the entire Eurozone has turned into a casino.

If we, and they, the ECB, Germany, Holland, Finland on the one hand, and Monti, Rajoy and Samaras on the other, want to play these moves AND have a shred of credibility left once they're done (and I know what you're saying: will they ever be done?), we and they will need in the end to be able to answer this one simple question. Which they will never ask, we will have to do that for them. That question is: Where's The Debt? Or maybe more accurately: What Happened To The Debt?.

If a party, be they an individual, a company or a sovereign nation, carries so much debt that it is vulnerable to attacks by the likes of bond markets (or bailiffs in the case of individuals), a handout or bailout will never suffice to abolish the threat for very long, unless it is provided on the condition that the debt that led to the threat in the first place is restructured. That is to say, creditors take a haircut on what is owed to them.

Handing over money to these creditors without that haircut doesn't even begin to solve the issue. It just - hopefully - keeps them quiet for a little while, but then they'll be back, because they're still owed money. Yeah, think Tony Soprano.

In the case of Europe, the EU's national governments, Germany's first of all, refuse to tackle the debt issue, when it comes to Italy and Spain, because it would threaten their own respective banks. And probably their pension funds too. The highly needed haircuts that would come with the highly needed debt restructuring, would threaten to expose the very real very dire situation that these banks are in. And that in turn would risk setting off a domino avalanche that would risk bringing down international - including American - banks as well.

And so the one question that makes any true sense to ask, is never asked.

In the case of Spain, it has become abundantly clear lately that there is no clear distinction to be made between bank debt and sovereign debt. Hence, an ECB bond buying program would be beneficial to Spanish banks too. If only because they own so much of the stuff, something they were coaxed into doing by the ECB schemes that allowed, nay pressed, them to borrow on the cheap to buy their own sovereign debt. Rajoy even suggested using the remainder of the €100 billion bank bailout for sovereign debt. Which is quite plainly illegal, but who's counting?

If you would add Spanish sovereign debt to Spanish bank debt, you would come up with a number that nobody in the whole wide world wishes to address (and so they don't).

Which is why we see Mario Draghi et al "invent" clever schemes to buy Spanish bonds even though that's not the ECB's mandate at all.

The latest line is that they do it to "stabilize the currency". Which is fine in itself, or so I guess, only we would like to know how long they would plan to stabilize it for (two weeks doesn't seem to cut it). And that issue is not addressed. Ever.

Hence, we are left to conclude that there is no effort to deal with the debt, there's not even an attempt to do it. Mario Draghi is merely trying to lift a corner of the magic flying finance carpet, so Spain can be allowed to sweep its true debt burden under it, out of our sight.

And a carpet can hide quite a bit of dead dust for quite some time, as you know if you've ever tried the approach. The thing about debt, though, is that it's not dead dust.

Debt lives. It's alive. It's almost organic. Debt festers and ferments under that carpet, it requires interest and principal payments, and it grows if these payments are not made.

Well, if you look at the real numbers, Spain can't even meet the interest payments anymore. And whether that's 6% or 7%+ is immaterial really. That's why it's in such a mess that Draghi feels he needs to come up with these rule and law bending and stretching schemes to begin with. If Spain had any chance at all of getting out from under its debt load on its own anytime soon, we wouldn't be talking about these ECB measures today at all.

But we are talking about them. And they lift financial markets. And as the Eurozone deteriorates, the euro - ironically - goes up.

Why? ¿Por qué? Because the markets think Germany et al will agree to join Mario Draghi's mind games and pay up to lower Spain's debt. As simple as that.

But Draghi has no solution for the Spanish debt, be it sovereign or bank debt. He just has that carpet to sweep the debt under.

Well, he perhaps has other options, like debt restructurings, defaults etc., but he's not addressing those. Mario is a servant of the banking industry. Just like any other central banker and government official in the western world.

There's no-one in sight who tries to balance the reality of the sovereign and financial sector debt with the ability of the people, the taxpayers, to pay for it. Which is why the Euro can be a hot item even as the countries that presently use it as their currency go down in flames. And their people go down with it.

Yes, there's money to be made in the markets. That's obvious when you look the numbers. But what would have to be at least as obvious is that none of it is based on anything fundamental.

This rally will implode upon itself.

Some of the big boys will have left in time, and made a killing. From the point of view of the people on the ground and in the street, however, it's not going to look all that great. They're mere pawns in a game that seeks to maximize profits off their backs.

And that will continue whatever Mario Draghi or Angela Merkel present in the way of grand plans. They may all look great, and the markets may react with yet another high of one kind or the other, but down the line there's still that one and only question that needs to be answered:

What Happened To The Debt?

Any plan that doesn't address that question directly is worth less than the digital paper it's written on. Any such plan won't solve a thing.

And that magic carpet that the likes of Mario Draghi are trying to sweep reality under? You know what? It's gruesomely expensive, but that's not all, the cost is not even the most important part. Here's what is: that carpet was bought on credit. And the collateral for that credit is the future of Europe's younger, even its unborn, generations. That's right, the generations that presently face 50% or so unemployment numbers.

Enjoy your rally. But do realize that you're trying to outsmart reality. It's hiding under a carpet, but it's no less real.

By Raul Ilargi Meijer
Website: http://theautomaticearth.com (provides unique analysis of economics, finance, politics and social dynamics in the context of Complexity Theory)

© 2012 Copyright Raul I Meijer - All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


© 2005-2018 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules