Circular economics

 

“The problem isn’t France, its Greece.” – a Swiss banker

Its interesting how the blame game gets played out all over Europe. The Swiss blame the French banking problem on Greece’s inability to service its debt in an appropriate manner, the Greeks blame the IMF for imposing austerity so that they can’t repay their debts, the Greek people are also pissed because the Greek bailout money didn’t hit the real sector, but went straight to the indebted Greek banks, so that they may by more of their own sovereign debt and so on and so forth.

The French banking sector is going to have a capital impairment issue if they continue to saddle up on Greek, Spanish, Italian and other dubious debts. But, in the banker world, buying trash is an excellent way to make money. They can:

1. Buy Spanish, Italian, Greek debt with money loaned to them from the ECB at dirt cheap manipulated interest rates – for 3 years (LTRO I & II). Making a spread of the 100 basis points to the ECB and 700 basis points on Spanish debt.

2. They can after obtaining these funds, buy the debt, and if,  either according to local regulatory rules or banking capital rules, dispose of some of this debt by collateralizing it at the ECB, at par, and getting even more excess reserves that they then gamble with in the derivatives market.

3. Get the funds from the ECB at 0,25% and directly park it back at the ECB for 1%. A spike in this liquidity category, that happens frequently during this crisis is a sign of immense supply (shadow inflation) and demand imbalance in the loan market.

The ring-around-the-rosy continues.

Is it still late to ignite economic freedom (aka Classical Liberalism)in Europe?

 

It’s official: The French have decided to go back forty and some years back, and the Greeks, well, the Greeks as it seems have made a statement to Europe that they couldn’t care less of what the EU-in-chieftain says. The electoral results that came in two days ago gave rise to some unlikely victors and EU orientated losers.

Tribal politics is the best way to explain the results of the election in Greece. The results are as follows for Greece:

New Democracy: 17-20%
Pasok: 14-17%
Syriza: 15.5%-18.5%
Independent Greeks: 10-12%
Golden Dawn 6-8%

The New Democracy party, as stated on Wikipedia, are the conservative liberal party that won this years election. How liberal (in the European sense) they will be, is yet to be seen.

The election of the other parties are a sign of frustration, in my opinion. Nothing more, nothing less. When the till now ruling PASOK party is being challenged by the radical Left: Syrizia and the radical Right: Golden Dawn, you know that the depression has lingered on in its fifth year and that the population is ready to go native.

The French, yet again have disappointed. Not that Sarkozy was any better; I personally see no difference between the two. Hollande is a Mitterand wannabe and a firm believer in the socialist doctrine. Not surprising, he is calling for greater ECB firepower to bring growth to France, even if that means purchasing power redistribution from its neighboring co-Europeans, the Germans. Saying NO to austerity and a burgeoning public sector, Hollande at least publicly says what the supranational institutions of The EU were made for: Buying political votes and making sure that the next credit cycle doesn’t happen; at least well into his last term as El-Presidente.

Just like the Germans, Mr. Hollande has to stop the rise of national debt, which is unlike the current mainstream figure of 86,1%, but more like 150%, when all the liabilities, guarantees and rescue money (which doesn’t exist) is added up. A great iconography is brought to you by ZeroHedge.

So, if France chooses to rise its absolute debt level, it will have to rely on the ECB to step in and make sure that its debt targets are met.

Because, if they don’t, it will bring about an interest rate spike that happened in Italy, Portugal and Spain. The additional ECB funds will certainly end up in the banking system at the largest French banks, who will in turn step in and by whatever the ECB deems too much. The banks will take the purchased bonds and collateralize them at the ECB for even new funds.

The ring-around-the-rosy splurge will continue. Maybe after fascilism has its go to run the economies of Europe for about a couple of years, maybe, just maybe, the serfs will finally realize the fact that freedom doesn’t only have a social concept tied into it, but rather an economic one as well.

Blessed be thy European (Union) Comrades

 

It still amazes me how gullible the press is, when large numbers are involved. This next news headline from business.hr in a rough Google translation goes as follows:

“The European Commission is preparing a master plan that would use  200 billion euros of public and private investment in order to activate economic growth in Europe, according to Spanish newspaper El Pais, which refers to "European sources."

The plan is focused on investments worth 200 billion euros in infrastructure, renewable energy and advanced technology, writes El Pais.

The European Union may decide to use double funding. One would have relied on the European Investment Bank (EIB) and European mechanism for financial stability (ESFS), continues  El Pais.”

Now, I know it may seem that the translation it a bit skewed, but the EU Commission is acting like Big Brother that possess infinite knowledge and a foresight which is second to none. The greater irony of this, is that, the news headline came out of Spain, the next PIIGS domino ready to fall in the over indebted Eurozone.

My only question is: Where is the money going to come from? If this is a project coming from the EU brass, which country will be on the hook for this cash? The cash I would like to remind doesn’t exist at the current moment.

If the plan is, as it is alleged in this report, going to be supported by the EIB, who will be the glorious capital contributor to this project? Has anyone done ANY calculation on the cost of capital of such an immense project? But, lets put all that aside and focus on the number at hand: 200 billion euros.

I really had no idea that the Eurozone as a whole has packed away in a nice tight closet somewhere the accumulated savings for financing such a venture. The back of this financing might fall on Germany, as is reported, the only country in Europe that has productive infrastructure. But, isn’t Germany also in debt?

The next list of items showing official vs. unofficial German debt is brought to you courtesy of ZeroHedge.

Germany in debt:

German Gross Domestic Product (GDP):                                   $3.2 trillion

Official German Sovereign Debt:                                               $2.618 trillion

Percentage of Liabilities at the European Union:                          27%
 
Percentage of Liabilities at the ECB                                           18.94%

Germany’s Percentage of the ECB Debt ($4 trillion)                    $757.6 billion

German annual cost for the EU budget                                      $46.36 billion

German Guarantees for the Stabilization Funds                          $280.6 billion

German Guarantees for the Macro Financial Assistance Fund      $211.14 billion

German Target-2 Liabilities                                                     $656 billion

German Guarantee for the EIB Debt                                        $157.29 billion

Sovereign Guarantee for KFW                                                 $588 billion

Total German Sovereign Debt & Guarantees                             $5.315 trillion

Official debt to GDP Ratio                                                             81.8%

Actual German Debt to GDP Ratio                                            139.8%

I highlighted some of the key debt measures in addition to official debt taken in when calculating the debt to GDP ratio.

As can be seen, the German economy tries to act as a sort of capital buffer to the debt of the other profligate Eurozone members (without any capital of course). Writing blank derivative checks to other stakeholders who own debt from various munis, corporations, banks and other agencies doesn’t really help solve the problem of DEBT, especially when these are guarantees written on who-knows what shady financial paper.

Germany, having written guarantees on EIB debt will probably be forced to take on more shadow debt and therefore indirectly subsidizing any investment project deemed satisfactory by the EU-in-chief.

And if the EU-in-chief decide to finance this splurge with another round of LTRO nonsense, we will have to wait and see where the next Keynesian bubble forms…

and subsequently implodes all around Europe.