Tuesday, December 13, 2011


From zero hedge.com

There's a slow-rolling run on Greek banks. Deposits are down 20% from June 2010. Quite simply, this will not end well for Greece, or the Eurozone as a whole. 

The Grand Bargain "fiscal compact" agreed to in principle Friday morning by the entire EU, save Britain, is already developing cracks. Problems are showing up in Finland, France and even Germany. The tentative agreement is a stability-cum-budget discipline pact: all stick and no carrot. The market had imagined that Mario Draghi, head of the European Central Bank, would see this commitment to austerity as a green light to start buying sovereign bonds and printing money. After all, mid-last week he had hinted at exactly this; but Friday he said no, and asked, rhetorically, "How could anyone have thought the ECB would break its charter to print money by buying new issues of sovereign bonds?"

More and more commentators are now writing: "Why austerity, when the problem is trade imbalances?" Remarkably, I have never seen any quotation from "Merkozy" indicating they understood this was the problem, not excessive public spending.

There is no "deus ex machina" that will emerge onto the stage (or as Paul Krugman wrote, there will be no "Draghi ex machina" to save the day.) The Germans and the French determined that this was a morality tale, and that the bad countries had to be punished. Wrong story. Wrong solution.

I am, quite frankly, outraged by the level of their arrogance.

So now the tragedy will unfold. First up, most likely, will be the downgrades: sovereigns and banks, surely France and possibly Germany. Equity markets may shrug, but credit will react. Sovereign yields will rise and values will fall, exacerbating the capital raise problem for the banks, holding tons of sovereign debt on their books. Almost no one has money to pump into the banks, with the exception of Germany; so most will shrink their balance sheets to get to the 9% target by the required June 30 deadline. The just beginning recession will accelerate as credit flows slow down.

Somewhere, some time in the not too distant future, there will be the dreaded "credit event" (a Greek default, one or more big banks going under, etc.), and the messy pot of bad stew will overflow. When? Surely by spring or early summer, but no one really knows. Remember: Argentina chose Christmas to default; so this could break open in the next few weeks.

This is an entirely unnecessary and avoidable problem. The decision by Merkel and Sarkozy to frame this as a good guy/bad guy morality play, causing everyone to castigate the "worthless, underperforming Mediterranean countries", is an unmitigated disaster. I hope they both get flat out fired in the next elections.

And don't believe anyone who tells you we are decoupled from Europe!

Hang on!

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