The disconnect in Europe just gets worse and worse, as I sadly predicted at least a few years ago, and have made a big deal out of over the last year, with the very pointed note that a European banking crisis is the #1 monster in my worry closet. Today, within 15 minutes of each other, I ran across the following three notes, from Zero Hedge, the London Telegraph, and the Financial Times, with a quote from Bloomberg as well. Read them all. And then try and figure out how they can all get what they want. There are going to be tears and lots of them somewhere. Greek three-year rates are now at 21%. And so I decided to link these three short pieces into your Outside the Box this week. To kick things off, a few teaser quotes and observations:
“On Saturday Jurgen Stark, an executive board member of the ECB, warned that a restructuring of debt in any of the troubled eurozone countries could trigger a banking crisis even worse than that of 2008.
“‘A restructuring would be short-sighted and bring considerable drawbacks,’ he told ZDF, the German broadcaster. ‘In the worst case, the restructuring of a member state could overshadow the effects of the Lehman bankruptcy.’” (From the Telegraph, with more below.)
“There is ‘no painless way’ for countries that sought aid to reduce debt, while a restructuring may cut off the respective country from the financial markets for an unforeseeable time, Stark was quoted as saying. The only viable path for such countries is to ‘strictly push through reform programs and repay debt in full,’ the central banker was quoted as saying. Stark did not refer to a specific country.” (Bloomberg)
Let me repeat a phrase here: “The only viable path for such countries is to ‘strictly push through reform programs and repay debt in full.’”
But in a well-done column from Zero Hedge, which discusses a controversial Citibank report, we learn that, “In addition, no country with Debt/GDP ratio of more than 150% has ever avoided a default anyways. Why would Greece be different?” Athens has said it will also implement fiscal measures worth €26bn in an attempt to reduce the budget deficit to 1pc of GDP by 2015. The plans have sparked a fresh wave of anger in Greece and more threats of strikes and marches from trade unions.
But the Greeks are not the only ones who are unhappy. I wrote about the Finns last week. Now we jump to a marvelous Wolfgang Münchau piece from the Financial Times (www.ft.com), which gives us additional insight and points out that the Germans are getting rancorous. A quote from this must-read piece: “A premature Greek default would change everything. As would the failure by the EU and Portugal to agree a rescue package in time; or an escalation in the EU’s dispute with Ireland over corporate taxes; or a ratification failure of the ESM in the German, Finnish or Dutch parliaments; or a German veto for a top-up loan for Greece in 2012; or the refusal by the Greek parliament to accept the new austerity measures; or a realisation that the Spanish cajas are in much worse shape than recognised, and that Spain cannot raise sufficient capital.”
All this bodes for a great deal of volatility and uncertainty, which markets hate. This makes for a very interesting Outside the Box, and one you should ponder and that we will be visiting in the regular letter in the future. Gentle reader, this is important. Let’s jump right in.
Your keeping one eye on Europe 24/7 analyst,
John Mauldin, Editor
Outside the Box
EU Poised for Greece Crisis TalksA delegation of leading European and international monetary officials are planning a crisis summit in Athens in May amid growing fears that Greece may default on its sovereign debt.
Senior officials from the European Union, the European Central Bank and the International Monetary Fund are expected to make a "lightning visit" for two days…