The EU’s Systemic Corruption Makes Solving the Crisis ImpossiblePolitics / European Union Feb 05, 2013 - 05:56 PM GMT
The single most difficult aspect about analyzing market moves in Europe is the impact of the political class on just about everything.
Worldwide, politicians are not exactly famous for honesty. However, Europe is a very special case… where just about everyone is lying on just about everything involving the economy and banking system.
This notion is illustrated wonderfully by Spain’s Prime Minister Rajoy, who was recently embroiled in a scandal in which he and many of the politicians in his party were receiving illegal payments for decades via a slush fund.
Rajoy himself allegedly received roughly $34,000 per year… from 1997-2008. This doesn’t bode well in any country, least of all one that has broken down to the point that pharmacies are running out of medicine and over 50% of youth are unemployed.
Rajoy first denied all of the allegations… then this morning stated that, “I repeat what I said Saturday: everything that has been said about me and my colleagues in the party is untrue, except for some things that have been published by some media outlets.”
At this point, why would anyone listen to what Rajoy had to say about anything?
Those investors who can remember back to last May, before Europe was fixed (by another massive lie, this one from Mario Draghi), Spain’s banking system was on the verge of collapse. What’s striking is that as late as May 28, Rajoy continued to maintain that Spain would not need a outside funding, stating, “there will be no rescue of the Spanish banking sector.”
At this point, Bankia had already requested its bailout and Spanish banks’ shares were in a free-fall. Moreover, Spain itself was just days away from requesting outside aid from the EU.
The timeline says it all:
- May 9th: Bankia requests €4.5 billion loan, Spanish Government states that the bank is “solvent.”
- May 21st: Spain meets Bankia’s request for loan and takes a 45% stake in the bank thereby instigating a partial nationalization.
- May 23rd: Bankia’s bailout needs grows to €11 billion/ Rajoy retorts to France’s Hollande, “Hollande does not know the state of Spanish banks.”
- May 24th: Bankia’s bailout needs grow to €15 billion
- May 25th: Bankia’s bailout needs are now €19 billion (2011 profits revised to €4 billion loss)… the Spanish Bailout Fund has just €5 billion in cash.
- May 28th: Rajoy comments, “there will be no rescue of the Spanish banking sector.”
- Weekend of June 8-10th: Rajoy texts to his finance minister: “Aguanta, we are the fourth European power. Spain is not Uganda… If they want to force the rescue of Spain, they need to start getting ready €500 billion and another €750 billion for Italy, which will have to be rescued afterwards.”/ Spain informally asks for €100 billion bailout/ EU Finance Ministers OK the bailout.
- Sunday June 10th: Rajoy states that the bailout is a “victory” before commenting, “This year is going to be a bad one: Growth is going to be negative by 1.7 percent, and also unemployment is going to increase.”
Thus, in just one month’s time, Spain implements the largest bank nationalization in its history and requests €100 billion from the EU to recapitalize its banks. And yet, throughout this time, Spanish politicians maintain that Spain’s banking system is “solvent” or in great shape… right up until they get the €100 billion at which point the truth comes out: “This year is going to be a bad one.”
Also note that Rajoy sealed the deal and which he proclaimed a “triumph” (along with the above statement about 2012 being a bad year) before hopping a plane to watch Spain’s soccer team play Poland.
So… Spain’s economy is lead by a man who denies that its banks are in trouble (despite one of the largest already being nationalized), then demands €100 billion for a bailout, calls said bailout a “triumph” before flying to watch a soccer match… all the while sitting on over €300,000 in illegal payments that he received in the decade leading up to the crisis.
There can be absolutely no trust in a system like this, nor can there be any transparency. The EU Crisis will not end until this sort of corruption and fraud is cleared from both the political class and the banking system (Spain itself recently admitted that several of its biggest banks have negative value).
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Chief Market Strategist
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Graham also writes Private Wealth Advisory, a monthly investment advisory focusing on the most lucrative investment opportunities the financial markets have to offer. Graham understands the big picture from both a macro-economic and capital in/outflow perspective. He translates his understanding into finding trends and undervalued investment opportunities months before the markets catch on: the Private Wealth Advisory portfolio has outperformed the S&P 500 three of the last five years, including a 7% return in 2008 vs. a 37% loss for the S&P 500.
Previously, Graham worked as a Senior Financial Analyst covering global markets for several investment firms in the Mid-Atlantic region. He’s lived and performed research in Europe, Asia, the Middle East, and the United States.
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