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European Debt Crisis Politicians Blaming the Short Selling Messengers

Politics / Global Debt Crisis Mar 12, 2010 - 08:10 AM GMT

By: Mike_Larson

Politics

Best Financial Markets Analysis ArticleOkay, stop me if you’ve heard this one …

You have an entity that took on too much debt. It cooked its books. It failed to get its fiscal house in order. Its “executives” repeatedly refused to take the necessary steps to rein in risk.


But when the LOGICAL consequences occurred — investors began dumping its debt and equities … and driving up the cost of insuring against default risk — what happened? Did officials listen to the message of the markets, apologize, find religion, and try to right the ship?

Heck no! They blamed the messenger. Only this time it’s not some crooked CEOs doing the whining and complaining. It’s a bunch of politicians! It’d be comical if it weren’t so sad.

Papandreou, Merkel, Juncker = Pandit, Mack, Fuld?

Two years ago, Wall Street's big wigs refused to accept responsibility for running their firms into the ground.
Two years ago, Wall Street’s big wigs refused to accept responsibility for running their firms into the ground.

Back in the financial market crisis of 2008, the CEOs on Wall Street couldn’t stop complaining about short sellers — a so-called evil cabal of greedy investors who unscrupulously borrowed their shares, sold them, then looked to profit as they fell.

Former Morgan Stanley CEO John Mack. Citigroup CEO Vikram Pandit. Lehman Brothers CEO Dick Fuld. They couldn’t stop pointing fingers — either then or now — at virtually everybody but themselves.

  • Never mind that these guys amped up leverage to sky-high levels …
  • Never mind that they made too many dumb real estate loans, corporate loans, and credit card loans …
  • And never mind that they just failed to foresee and prepare for the mortgage, housing, and credit crises.

They squarely laid the blame for the collapse in the value of their stocks and bonds at the feet of short sellers.

While in Washington this week, Panpandreou grandstanded about market speculators; then returned home to a hotbed of discontent.
While in Washington this week, Panpandreou grandstanded about market speculators; then returned home to a hotbed of discontent.

Worse, they managed to get the government to implement a short-term, short sale ban in late 2008. That led to a massive, very short-term rally … one that quickly faded — with vulnerable financial stocks tumbling anew — even after the ban was passed!

The lesson? That dismal fundamentals always, always win out over mechanical attempts by officials to manipulate the markets. If you don’t get your house in order, or you run your company into the ground, then you deserve to see your stock and bond prices tank.

And yet, here the same sorry movie is playing out again. Only this time you can substitute names like German Chancellor Angela Merkel, Luxembourg Prime Minister Jean-Claude Juncker or Greek Prime Minister George Papandreou for Mack, Pandit, and Fuld.

  • They’re blaming hedge funds, so-called speculators, and other nefarious market players for their woes …
  • They’re slamming the credit default swap market for driving up their borrowing costs …
  • And worse, they’re pushing for the debt market equivalent of short-selling bans, just like those whiny banking execs did almost two years ago.

From Greece’s Papandreou in a Washington speech:

“Europe and America must say ‘enough is enough’ to those speculators who only place value on immediate returns with utter disregard for the consequences on the larger economic system.”

Merkel, for her part, added that:

“We’re of the opinion a quick implementation of actions in the area of CDS has to happen [to curb] ongoing speculation against euro-region countries.”

News Flash Folks: Here’s the REAL Reason Your Bonds Are Tanking!

I’m going to keep things simple for the politicians — not just in Europe, but here in the U.S., too. Your bonds are falling, and your cost of borrowing is going up, because your fundamentals are deteriorating!

You all have too much debt, super-sized deficits, and you lack the political willpower to take the difficult steps to get things back on track.

Take Greece. The country is running a deficit equivalent to 12.7 percent of gross domestic product, more than four times the 3 percent cap mandated for the 27 countries in the European Union (EU). It needs to sell $72 billion worth of bonds to fund itself, roughly 20 percent of GDP.

Sadly, politicians lack willpower to do what's right.
Sadly, politicians lack willpower to do what’s right.

Both Standard & Poor’s and Fitch Ratings have responded by slashing Greece’s sovereign debt rating to BBB+. Moody’s is contemplating its own ratings cut to Baa1 from A2.

In Portugal, the economy is in freefall. GDP shrank 2.7 percent in 2009, the worst recession in more than six decades. The unemployment rate just surged to a 23-year high of 10.1 percent.

Meanwhile, the country’s budget deficit has jumped to 9.3 percent of GDP, more than triple the EU limit. Its overall debt load is now 85.4 percent of GDP, the worst in 20 years. In response, the ratings agencies have also downgraded Portugal’s credit outlook.

Ireland is in even worse shape. The collapse of its own real estate bubble has devastated its economy, which plunged 7.5 percent last year. The nation’s budget deficit is closing in on 12 percent of GDP.

As for Spain, the deficit is only a bit smaller, at 11.4 percent of GDP. But the economy has been shrinking for almost two years, while unemployment has soared to 19.5 percent.

Worse, instead of cutting back, the Spanish government has ramped up spending in an attempt to bolster the economy — a move that’s starting to backfire as global investors rush for the exits.

What about Italy? Its debt load should hit 117 percent of GDP this year, the second-worst in the EU, right behind Greece.

Again, the common thread is too much debt, oversized deficits, too many economic problems. And the market response is also the same — plunging bond prices and surging interest rates, as well as an increase in the cost of CDS insurance. It’s not that evil speculators are unfairly manipulating things. It’s that the fundamentals stink!

You politicians and political types want to stop the move in stock, bond, and CDS prices? Then get your houses in order! The equivalent of a short sale ban in the debt markets won’t get you anything more than a very short-term respite.

Until next time,

Mike

This investment news is brought to you by Money and Markets. Money and Markets is a free daily investment newsletter from Martin D. Weiss and Weiss Research analysts offering the latest investing news and financial insights for the stock market, including tips and advice on investing in gold, energy and oil. Dr. Weiss is a leader in the fields of investing, interest rates, financial safety and economic forecasting. To view archives or subscribe, visit http://www.moneyandmarkets.com.


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