Guest Author: Jack H. Barnes, who writes at Jack H. Barnes, jackhbarnes.com. Longer bio available at prior post.
The EU is under attack from a small army of well-dressed professionals that are within the EU itself. They are a response to the actions taken by past and present governments of the Sovereign states that make up the EU.The irony is that while the EU and the ECB might not survive this crisis, it was introduced by their own actions. The crisis is being fueled by risk managers doing their jobs.
The impact is happening due to individual traders adjusting to the *NEW* risks introduced by the current governments of the EU area. The Newton law of physics still rules in the financial world. For every new action, there is a counter action in the market.
This all started when the world realized that a European bailout fund was necessary last spring, and it was setup without the capacity to handle a real crisis. It was lacking in the *Shock & Awe* in the same way that Paulson’s rescue Bazooka was quickly put to the test.
The European rescue and stabilization fund is what unleashed the bond vigilantes, and now the fabric of a new “EU” national identity is fraying from the impact of their selling. This is self inflicted pain by European risk managers fleeing the implications of the actions of the European bureaucrats.
European Sovereign states have grown used to having access to the world debt markets at cheaper rates than their internal budgets would have given them. They are like an addict who has been informed that the price of their fix has just doubled.
When you are an institutional holder of a bond that is overvalued, it is your responsibility to sell it and book the best value you can get for your investors. The risk managers are factoring in risk.
The leaders of France and Germany can threaten naked speculators all they want in public, but it is their retirement funds that are selling, and it is their insurance companies that are selling. It is the basic fabric of their economy that is generating the selling of these bonds.
These bond-selling attacks are driven by real world risk management requirements. Each nation that takes a bail out from the fund is seeing its bond rates continue to fly higher, as the compounded effects of the rescues undermine their future ability to handle the new debt loads based on realistic assumptions.
You only have to look to last summers European stress test, which had zero banks in Ireland in trouble. The same Irish banks that needed a full bail out this last fall, a mere 5 months later. The ECB lost all creditability with the *REAL* market at that point in time.
There is always a point in the economic curve were the hangover from the prior events start to impact current ones. You only have to look to the foundation of the EU itself, to see that it resides in a Sovereign state that has not formed a government in 7 months. There is no sign of a new one happening any time soon.
Belgium is the dark horse in the mix of nations that need a bailout. While debt to GDP is already around 100%, it is the subtler issues at play in Belgium that makes it the Dark Horse of Europe.
- CDS spreads over Germany are near historic highs
- Separatists are the largest party in the group
- Rich tired of subsidizing Poor economics
- Bi-lingual state issues
The national mood is pessimistic about its future. The caretaker government has been tasked with tightening their belts harder, as the King assumes a larger and larger role in politics. When Royalty needs to be more than a figurehead, you know you have domestic issues that have to be addressed.
Early this week, King Albert II took the exceptional step of prodding the caretaker government to set tough budgetary targets for this year in an attempt to soothe the markets.
“We will take up our responsibility and we will make the necessary decisions to guarantee durable and healthy public finances,” Leterme said, insisting the limits of a caretaker government would not keep him from pushing through cuts and austerity if the political crisis continues.
It is likely that Belgium will shatter in the coming months to years, as the separatist party continues to gain strength. If it happens in the near term, it will not be a planned event like what happened in Czechoslovakia after the velvet revolution.
In the future, the EU could find itself headquartered in a state that is not part of the EU or ECB. That level of irony would be rich, to say the least.
