Friday, August 17, 2012

If an EU Leader Says It, Don't Believe It

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. We have coined this term to describe the current monetary and fiscal policies of the U.S. government, which involve unprecedented money printing. This is the official blog of the New York Investing meetup.

German leader Angela Merkel revved up the markets on Thursday by saying once again that she and the other EU leaders would do everything possible to save the euro. If traders realized how reliable previous official statements concerning the Eurozone debt crisis have been, markets would have experienced a major selloff.

When the debt crisis first appeared in Greece, Merkel said there would be no bailout and the Greeks would have to solve their own financial problems. ECB President Trichet made it clear that Greece wouldn't receive any special treatment. It wasn't long before they both backtracked on their public statements. On April 11, 2010, a €30 billion bailout was agreed to and this was raised to €45 billion on April 16th. By May 2nd, a total package of  €110 billion had been arranged. This amount was meant to fix Greece's debt problems once and for all. The Washington Post reported that IMF director, Dominique Strauss Kahn, and EU Commissioner Olli Rehn stated, "the plan would lead to a more dynamic  economy that will deliver the growth, jobs, and prosperity that Greece needs in the future". If there were a worst-forecasting-prediction-of-all-time award, both Strauss-Kahn and Rehn could be potential winners.

Not only did the Greek economy not prosper, but it went into a tailspin. Other claims made by the EU proved to be equally absurd as well.  As reported by BBC News, the Greek debt to GDP ratio was supposed to rise from 115% at the time of the bailout to 149% in 2013, when it would then fall. Instead it rose to 165% in 2011. Greece's budget deficit was expected to be down to 3% of GDP (the EU target rate that all members states are obligated to meet). If Greece is lucky, it's deficit will only be 7.3% of GDP this year. It is expected to rise again in 2013 however to 8.4%. So much for that.

Even though Greece missed the EU and IMF's projected targets by a mile, this was only possible because a much bigger bailout took place in 2012. Greece received an additional €130 billion  and got to effectively write off almost 75% of its government debt held by private bondholders (the ECB and IMF were exempt from the write down). Certainly Greece must be better off after €240 billion in bailouts and writing off a big part of its debt, isn't it? Well, no it isn't. Before the first bailout in 2010, Greece had around €300 billion in government debt. Just released figures indicate in now has €303 billion in debt. While debt is no lower, GDP has collapsed, falling over 9% in 2011 alone and currently on target for an over 6% drop this year. Unemployment has skyrocketed with the someone under 25 being more likely not to have a job than to be working. By almost any criteria you wish to chose, the EU, IMF and ECB program has been a complete failure.

Now the EU and its partners are preparing to bailout Spain. Already a €100 billion loan has been committed for Spanish banks. This doesn't include any funds to bailout the government. How bad is the situation in Spain?  Well, Reuters has reported that one of Spain's regional mayor robbed a number of supermarkets last week and distributed the stolen food to the poor. As a member of  a regional parliament, he is immune from prosecution. Government stealing from those that have is of course nothing new, but apparently in Spain there's no attempt to hide it.

It looks like Spain will be asking for a full-fledged bailout soon. The EU will then directly take over its finances.  The total bailout could easily involve a trillion euros or more, unless some EU country stops it after realizing the damage this is going to cause the EU itself, let alone Spain. The long-term implications are likely to be quite ugly for both.

Disclosure: None

Daryl Montgomery
Author: "Inflation Investing - A Guide for the 2010s"
Organizer, New York Investing meetup

This posting is editorial opinion. There is no intention to endorse the purchase or sale of any security.


Kristi said...

Your assessment of one trillion euros plus a bit more for Spain pretty well matches with what I calculated in my recent analysis “Europe’s Debt Hole (Numerical Assessment)”. My calculations further suggest that this forms approximately 21% of the eurozone’s current excess debt that needs to be either written off or inflated out to get back on track. (So bailout in the form of loans would not help.)


The euro zone is dead.