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Why Aren’t We More Worried About Europe?

Back in February 2010,  a clearly very sharp and articulate reader responded to a DollarCollapse.com article on Spain’s coming sovereign debt problems with the following:

Dear John,

I like very much your site … but about Greece, Spain and the Eurozone you obviously have a US bias. In my opinion, you are indeed missing four key aspects of the situation:

1. Greece is known for three decades to be ‘the’ failed EU enlargement. So what is going on there is as much a crisis of the Greek debt as much as an intrumentalisation of the situation by other Eurozone member states to put Greece once for all on the right tracks.

2. for three years, the Eurozone leaders have been desesperately trying to find a way to prevent the Euro-Dollar rate to rocket till 1,60, 1,70 or more. And thanks to the very amateurish GoldmanSachs/hedge funds bets against the Greek bonds and the Euro, they are served on a silver plate with a Euro-Dollar rate at 1,36. So don’t expect the Eurozone leaders to hurry anything in order to get the Euro-Dollar rate back to 1,50. -)

3. despite the amazing propaganda machine around the Greek debt (snow storms on the East coast were the only recent things which were not put on the back of the ‘Greek bond fear’), the Euro-Dollar is stable at 1,36. Guess what will happen when the ‘Greek tragedy’ will pass fashion as it starts to do? by the way, with only 70 000 demonstrators in the streets of Athens two days ago (a very small number by Greek standarts), it is now clear that Greek public opinion will accept the austerity measures. Too bad for one of the ‘Greek tragedy’ scenario: political instability. You may read http://www.leap2020.eu for more on that aspect.

4. Spain got into the Eurozone in a fair way (not like Greece) and its exposure to real estate wounds is nothing compared to US or UK. Meanwhile in the Eurozone the heavyweight, like Germany, is sound … while in the US, it’s the heavyweights (California, Florida, New York, Michigan, …) which are in trouble; and in UK, everything is in trouble. So, the day Spain will be suck into such problems will be the exact same day UK and US will be as well. I make a bet that on that very day, nobody will care of Spain and the Euro ‘problems’ … but everybody will run away from the Pound and the Dollar.

In conclusion, you are right to stick with your great website’s name, ‘Dollarcollapse’ : what we are seeing right now is the early stage of a major currency war. And after a big offensive against the Euro, the Pound is already sinking, and the Dollar has not gained much ground. The counter-attack is coming, thanks to US economy : with no recovery in sight, a Eurozone not falling apart, and the Chinese unloading T-Bonds, …. well, the result will indeed be the coming ‘Dollar Collapse’ …! -)


It’s been a year, and the euro is still hanging in there. And Greece has indeed been replaced in the headlines by the Middle East and Japan. But below the fold, so to speak, the Eurozone’s problems have been worsening. None of the PIIGS countries are solvent and each is edging closer to some form of default/debt restructuring/social meltdown. Meanwhile, the ability of the richer European countries to deal with future (and inevitable) crises is politically in doubt. Here’s a survey of recent articles on the subject:

No One to Share Burden of Spectacular Irish Banking Cost
The Irish were only recently made painfully aware of financial black days when they were told they were in hock to the private debts of their banks. Last year a so-called Terrible Tuesday was followed by a Tectonic Thursday and other grim days when the public here learned they were to be held responsible for debts of over €46 billion. The bill for bailing out its delinquent banks already amounted to 28% of the annual output of the economy, or more than all the tax revenues the government raises in a year.

But that was before this Thursday’s disclosure of stress-test results showed four Irish banks will need €24 billion more from Irish taxpayers. It was just another extraordinarily grim day. It was made clear that Irish taxpayers will be on their own in carrying the costs, while senior bond holders would be protected.

At €70 billion, the public cost of Ireland’s banking implosion is spectacular. The bill now represents 45% of the economy’s annual output. However, legacy loan losses across the system, including those from a handful of British and Danish-owned lenders, will rise to exceed €100 billion.

Irish Central Bank Governor Patrick Honohan says, for the size of the economy, the bust will be among the costliest in history. “This is quite a big crisis, as everyone knows,” the governor said Thursday as the authorities also confirmed the effective nationalization of the entire banking system.


Irish Bow to Trichet on Bondholders as Rescue Hits $142 Billion
Ireland yielded to the European Central Bank to protect bondholders even as its bailout bill for the region’s worst banking crisis moved to as much as 100 billion euros ($142 billion) after stress tests.

The ECB in Frankfurt was “solidly opposed” to imposing losses on investors in senior bank debt, Finance Minister Michael Noonan told broadcaster RTE today. The ECB agreed to provide “ongoing” funding for the banks, he said.

Ireland agreed yesterday to inject as much as 24 billion euros into four banks, while leaving bondholders untouched. The government already funneled 46.3 billion euros into the financial system and set up an agency that paid more than 30 billion euros to assume risky property loans. The total equates to about two-thirds the size of the Irish economy.

“The government’s position is very clear: It doesn’t want to take action on senior bondholders for the four banks that are going forward,” said Matthew Elderfield, head of regulation at the central bank, said in an interview with Bloomberg Television. “It recognizes that, on balance, that if you want to have these viable banks able to return to the market that would hurt their capacity to do that.”


Spain May Take Over CAM After Talks on Merger Falter
Ailing Spanish savings bank Caja de Ahorros del Mediterráneo began discussing its possible nationalization with the central bank on Thursday, after its merger with three small peers fell apart late Wednesday.

A spokesman said the Alicante-based savings bank, or caja, is presenting the Bank of Spain with a new business plan and an application for money from Spain’s state-financed Fund for Orderly Bank Restructuring, also known as FROB. He declined to say how much money the bank, known as CAM, needed, but analysts calculate that it would be enough to give the FROB control of more than 50% of the bank.

The nationalization of CAM would be the first since the Spanish government, under pressure to shore up international confidence in the health of the country’s banks, in February set new minimum capital requirements. It said it would take equity stakes in those institutions that weren’t able to raise new money. The Bank of Spain estimated that 12 banks would have to raise a total of €15.15 billion ($21.4 billion).

The confidence-boosting exercise, however, fell flat, as many independent analyses said Spanish banks would need much more capital. Moody’s Investors Service, for example, estimated that banks would need between €40 billion and €50 billion.


Fitch Slashes Portugal’s Ratings To Verge Of Junk
Fitch Ratings on Friday slashed its credit ratings on Portugal to one notch above junk status after concluding that the embattled nation was less likely to seek external support in the near term after setting elections for June 5. Fitch said it viewed external support as “necessary to bolster the credibility of Portugal’s fiscal consolidation and economic reform effort, as well as secure its financing position.”

It warned that any delay in securing help from the European Union and the International Monetary Fund would increase risk to the country’s economy and financial stability; Portugal’s borrowing costs have surged to unsustainable levels after Prime Minister Jose Socrates tender his resignation last week following the rejection of his latest austerity package.

Socrates is now head of a caretaker government that will remain in power until a new government is sworn in. Portugal’s President Anibal Cavaco Silva said the caretaker government has the power to request external help but the country’s Finance Minister Fernando Teixeira dos Santos claims the government has lost legitimacy and therefore wouldn’t be able to ask for or negotiate a bailout.


Merkel Faces Pressure on Euro, Taxes
German Chancellor Angela Merkel is coming under pressure to sharpen her party’s conservative approach toward Europe, taxes and other issues after a devastating regional election defeat over the weekend.

Voters in the wealthy southern province of Baden-Württemberg on Sunday booted Ms. Merkel’s Christian Democratic Union from office after almost 60 years of continuous rule. The stunning loss in a populous state has emboldened party members who have long argued she has strayed too far from conservative principles.

One obvious target for conservatives is the government’s strategy for dealing with the euro-zone debt crisis. Many Christian Democrats have been disappointed that the chancellor’s harsh rhetoric about runaway government spending in Greece and other weaker euro-zone countries hasn’t been backed up by equally punitive policies. Ms. Merkel has sought to appease German voters with public calls for tough sanctions on countries that break deficit rules, but has endorsed generous aid packages demanded by her fellow euro-zone leaders.


And Greece, which did for a while drop from the headlines, is back:

Greek budget deficit likely higher than estimated: minister
Greece’s budget deficit “very likely” closed above the official estimate of 9.4 percent in 2010, the finance minister said Wednesday amid signs the government’s effort to boost tax revenue are failing.

“We started from a deficit of around 15.5 percent. The 2010 deficit we will find out from the statistics authority, I cannot give an estimate but it will very likely be higher than 9.5 percent,” George Papaconstantinou told private Real FM radio, according to a transcript posted on the station’s website.

Greek reports this week said the slippage was owing to additional pension fund deficits found by auditors from the European Union’s statistics service Eurostat who have been in Athens since last week.

If those findings are confirmed, the 2010 deficit could exceed 10 percent of Gross Domestic Product, the reports said, despite draconian spending cutbacks that sparked waves of general strikes and protests last year. Greek long-term borrowing rates remain prohibitively high and the country’s credit standing has been hit by successive downgrades from rating agencies, the latest on Tuesday from the Standard & Poor’s.


Greek teachers, doctors on strike to protest planned spending cuts
State school teachers and hospital doctors in debt-ridden Greece have walked off the job to protest planned education and health spending cuts. Doctors in the social security fund system were also on strike for the second day Wednesday, demanding that their fixed-term contracts be made permanent. Health and education unions are planning demonstrations in central Athens later in the day, to protest planned school and hospital mergers.


Some thoughts:

Clearly, nothing has been fixed in the past year. Politicians have made some promises and attempted to keep them. But they’ve failed. After a round of big spending cuts, the PIIGS countries are still light years away from the Eurozone’s 3% deficit target. Germany, meanwhile, has been leveraging itself via debt guarantees, with little to show for it. Voters across the continent seem to have lost their appetite for either new austerity measures or increased bailouts.

Going forward, will any PIIGS country electorate accept a radically diminished standard of living in order to allow big international banks to keep paying six and seven figure bonuses to their executives and traders? Will German voters accept higher taxes and slower growth just so the Portuguese, Irish and Greeks can avoid paying the bills they’ve run up? The intuitive answer to both is “hell no”, and recent elections bear this out. So expect the plans now being cooked up by Eurocrats and their bankers to fall through in the coming year, and be replaced with “haircuts” on euro-denominated bonds, followed by big writedowns in bank earnings.

And that’s if the process goes smoothly. The worst-case scenario of riots, falling governments and debt defaults would put Greece and the rest of Europe in the headlines for a long time to come.

15 thoughts on "Why Aren’t We More Worried About Europe?"

  1. Gee Fred, I’m SO happy that Britain is not in “serious trouble.”

    Or were you speaking sarcastically?

  2. By the way, anybody who thinks Britain is in trouble, please take note of the fact that Britain was driven into this disaster, by long time admirer of John Maynard Keynes, Gordon Brown.

    In England, he has numerous nocknames, including Calamity Brown, Flash Gordon, Gordon BrownedOff, and Gordon Clown. He has even been referred to as the “One-eyed Scottish Idiot”. And he is still referred to as “that idiot”.

    Britain is lucky that Brown is still not in power, or else Britain would be in serious trouble. New Labour = Old Rubbish.

  3. Basically, there is control of the story concerning the state of the economics of the PIGS.

    Ireland is not as bad as the story is making out. Yes, Ireland has serious problems. But Ireland is still trading positive with the world, and is still creating jobs. This is something that France cannot do consistently.

    Likewise Portugal is not in as severe a crisis as people think. There is a lot of money in Portugal despite the crisis.

    However, Spain is lying through it’s teeth. Basically, Spain cannot afford to tell the truth. And Europe cannot afford if Spain tells the truth. The Spanish banks are holding non-paying mortgages on empty, often deserted properties. And nobody thinks that this should be on their balance sheets. The Spanish government is misrepresenting the GDP statistic. The Spanish government is also engaging in “off-balance sheet accounting” to borrow money to get around the government bond market borrowing methods.

    And Greece, while it is a land with many, many rich people, will not honour it’s debts. Impossible. Simply put, the Greeks will not pay up. They have a persistent habit of borrowing and not paying the money back. And they get away with, because suckers come along and offer them money. Good enough for the fools who fall for this.

  4. As long as Fed is able to print money, everything is manageable. No one will stop them. In their eyes, we are just suckers

  5. Could not agree more with Raid3000.

    US is trying to break the Euro in order to maintain the USD afloat. Problem is that China and Japan, the 2 biggest customers for USD, are not that stupid and know what is really happening (it seems they do not read the US media…). They must be pretty worried about their USD reserves right now, slowly moving away from the USD as a reserve currency.

    Also, as China will move towards a floating exchange rate within this decade (objective 2020?), they will purchase less and less foreign currencies to weaken the Yuan. I guess soon US will blame China for manipulating the USD and strenghening the Yuan…

  6. Dear John,

    Here I am again, the ‘very sharp and articulate reader’ of last year (thanks for the compliments -)).
    Your question is definitely very relevant as the past 12 months have shown that the fears about a possible Euro collapse were largely overdone to say it diplomatically. More bluntly, let’s say that they were essentially orchestrated in order to achieve four goals serving different categories of major players.
    Let’s try to list them:

    1. From a Wall Street/Washington point of view : trying to break the Euro zone in a last ditch attempt to restore the US Dollar uniqueness as a credible reserve currency

    2. From the City of London/UK : trying to break the Euro zone in a last ditch attempt to prevent UK to be completely isolated in Europe, stuck with its fragile British Pound and facing the perspective of faster integration of the Eurozone, becoming a semi state Euroland, in order to resist the global crisis.
    And of course to try to divert people’s attention from the dire situation of British finance and economy.

    3. From Wall Street and the City of London : easy speculative profits, pushing people to bet on the 1€=1$ trend by the end of 2010, when the major players knew very well that the trend was going to be in fact going in the other direction. A lot of people lost a lot of money believing the almost unanimous opinion of last Spring.

    4. From Eurozone officials : playing with fire by strengthening the crisis feeling, in order to obtain two major results : on the one hand, preventing the Euro to appreciate too much and too fast vis a vis the US Dollar; on the other hand, to create a situation within the EU allowing what happened in May 20120, and was called at the time by LEAP/E2020, the ‘Eurozone coup d’etat’ (http://www.leap2020.eu/GEAB-N-45-is-available-Global-systemic-crisis-From-Eurozone-coup-d-Etat-to-the-tragic-solitude-of-the-United-Kingdom_a4666.html).

    One year later, one can see that despite the very intense downgrading activity of the 3 major rating agencies, nobody cares anymore as the Euro now moves upward when Moodys or else downgrades Portugal or Ireland or Greece. The key element which explains why it is now impossible to trigger again the panic of Spring 2010 regarding the Euro is precisely this ‘coup d’etat’ implemented by the Eurozone countries. They decided to build a big protective system of their own, transfering huge financial and budgetary powers to the Eurozone level and moving full speed towards a kind of Euroland bond market. Contrarily to what most Euro crash promoters were thinking especially in the USA and UK, Germany did play the Euro game, and played it fully. So, in my opinion, as in the opinion of the LEAP/E2020 people who were the only ones in May 2010 to clearly describe what has happened since then, the time for a Euro crisis is now over. The weakness of the Euro to the shock of the global financial crisis was essentially linked to the lack of preparation of the Eurozone to such a shock. now not only the preparation is made, but every month, the Eurozone is adding new elements to what is rapidly becoming a new sovereign of its own, the Euroland. And last but not least, the fact that despite all the hype about its collapse, the Euro resisted has generated a solid faith in the Euro in China for instance. Not a detail for the coming years.

    But, let me add a remark about something which stikes me a lot when I read even the most candid American analysis on the financial crisis : there is a complete lack of understanding on how operates the European integration process. It looks as if the Americans were only looking at the European integration through the English eyes. Something very ineffective to understand what’s going on on the European continent as UK is being completely sidelined by the current events, and has always seen the European integration as a threat (not exactly the best way to offer a candid and impartial view on it). In many ways, I believe that it explains why, even now on your great site, there is obviously a big difficulty to grasp the extent of the Eurozone progresses in past quarters.
    As a matter of fact, when I see the references you mention in your article, it illustrates my point : to quote essentially the Wall Street Journal on the topic of the situation of the Euro, is like quoting the Pravda in the mid 1980s about the situation of the Western world : the Iron Curtain and USSR were about to collapse but the Pravda was full of articles describing how the capitalist world was falling apart. Sorry for the blunt comparison, but I do think that it really matches the facts. It’s time to move beyond American and British press to understand what’s going on in the Euroland. -)

    To conclude, I will just say that, as I wrote last year, we are indeed entering the time of the DollarCollapse as you site is called. LEAP/E2020, again -), has been calling for next semester the explosion of the T-Bonds bubble. and personnaly I don’t see anymore one single element which may prevent it to happen on such a short term.

    And it would be great if you, John, and Franck Biancheri, the coordinator of LEAP/E2020, would give us, every couple of months, a kind of cross transatlantic vision on the Dollar-Euro, US-EU evolutions. It could be very interesting indeed. A new kind of very useful transatlantic dialog!

    Best regards


  7. I always think it’s useful to reduce these gigantic numbers to human-manageable terms. Even at “just” E70B, the Irish bailout is enormous. Expressed in dollars and divided over Ireland’s mere 6.2M population, it comes to about $16,000 per person. That of course includes infants, the elderly, the indigent, and so on. Compare that to our bank bailout in the US, which at $780B (I believe) spread over 300M population came to about $2,600 each. But even Ireland’s bank bailout is dwarfed by our per-capita current total US federal debt obligation, which at $14T divided amongst 300M comes to about $45,000 per person, or $135,000 per taxpayer. It’s clearly and utterly untenable. And that doesn’t even include our long-term obligations. And speaking of Ireland again, it appears that someone did some research on who the beneficiaries of the Irish bailout are. Read and weep: http://golemxiv-credo.blogspot.com/2010/10/who-are-bond-holders-we-are-bailing-out.html

    1. Jerone: you seem to be confused. Measured in terms of dollars, even a collapsing currency like the Euro looks good. The fact that the Euro now buys more dollars than awhile ago is of little significance if both of them are in a race toward worthlessness. On the day that a loaf of bread costs you $100,000 and the same loaf in Europe costs E70,000, it will make little difference to you which currency you were holding. After one or two or a few loaves of bread on either continent, you will be out of cash.

  8. If you make the basic (and very reasonable) assumption that silver is real money, then it is quite obvious that both the Euro and the USA dollar are being viciously devalued, at almost warp drive speed. Silver has served as money for eons, and it looks to be regaining that role now.

    Since last August, both the Euro and Dollar have lost over 55% of their buying power, as measured by real money (see definition above).

    It is possible that all of the Silver Chicken Littles are right and the silver price in fiat will come crashing down? Yes. It is equally possible that one or more very big players has decided that the best way to inflate away the trillions in unpayable Euro and dollar debts is to debase the currencies, and that the stealthiest way to do so is to bludgeon the gold:silver ratio. Then they plan to confiscate the outstanding gold at a rate of 10 (or less) silver ounces per gold ounce. Unethical? Yes. Whatcha gonna do about it?

  9. Why aren’t we more worried about Europe? For that matter, why are we not more worried about everything? Or, is that really the problem, that already we have worried about so much for so long that we’ve become numb. Art Cashin, director of floor operations for UBS, calls it “Greek fatigue” whenever the latest new problem is meet with ambivalence by the investment community, since that was the last decent panic that they could muster. Ayn Rand called this limitation of man’s conscious awareness of distinct entities or events “the crow epistemology” (At some point you can no longer discern an additional crow to a large flock.)

    Stated differently, if Wall Street isn’t worried than neither are most investors and the fawning media, who take their cues from it. But why isn’t Wall Street worried? Shouldn’t they be? Probably so, as we shall see, but fundamentally it is because they share the same political beliefs as the leaders on the Continent. Earnest high-minded intellectuals are at the helm and ‘they’ll figure it all out’.

    And, ironically, that is precisely why the rest of us have locked and loaded and then mostly tuned out. We’ve all seen this play out (tragically) before, so the end game is already obvious to us and the blow by blow details are so provincially European that they’re boring.

    I know that’s how I feel about them. In fact, I even resent the way European “leaders” are handling the situation. I may just be on a roll right now because I’m studying the “lessons of history”, that every new generation (everywhere) seems determined to flunk, but I am particularly ticked off at Europe. To the extent that one can apply the phrase “so smart that they’re stupid” Europe is a perennial. It seems to be the wellspring of that existentially toxic brew of intellectuals mixed up in politics.

    I consider the euro/Eurozone ideal and its inevitable (judging from history) demise to be the latest big catastrophe on par with WW1 and WW2 (never mind the clusters before that). I’m not saying it will lead to war, that’s not my point. I’m saying that the way the peripheral country’s debts are being handled by the leaders of the banking interests and more powerful countries are the same philosophically as they were leading up to the last two big wars. In all three circumstances there were overriding intellectual and emotional convictions that both blinded the leaders to obvious objective facts and compelled them to support ideology over the lessons from history.

    Not withstanding the conjecture that the euro/Eurozone may be an inherently flawed concept in itself, the first – or at least most obvious – mistake was in not containing Greece’s problems to the responsible parties. Once again ideology trumped common sense and economic realities just as it always has. Once the cat was out of the bag and moral hazard established the rest of the world changed channels knowing how it will end but not interested in watching another incestuous epic (perhaps another mistake). The now all too familiar and characteristically European hand-wringing, machinations, promises, commitments, proposals, red herrings, and everything else but tangible responsible actions continue to obfuscate, but now involving four countries, and counting.

    Once again, it didn’t have to be this complicated, but when the intelligentsia is involved in politics every problem becomes a dissertation.
    And that’s not popular reading.

  10. In the short run (think:while they can get away with it) politicians will sell their populations out. But in the medium to longer term this strategy gets exposed and an adjustment occurs either through electoral reform or violent protest. Selling out only works until people realise they are tax slaves to foreign bondholders. The mainstream media will try to lie, deny and pretend this isn’t the case but eventually the people work it out …..

  11. When thinking of European domestic squabbles I think that the following thought needs to be kept in mind. Although each of the European nations have their own national interests and the voters of those nations demand that their politicians respond to the desires of the national electorate and the national governments between themselves press for policies which benefit their own nations – never ever underestimate the propensity, and to my mind almost an inevitability, of national politicians of all stripes to betray national interest and cede control over national affairs to supra-national EU bodies (i.e. centralised control). For example when the new Irish government is faced with choice of betraying the Irish people or being seen as bad Europeans they will chose the former.

  12. “…So expect the plans…to fall through in the coming year, and be replaced with “haircuts” on euro-denominated bonds, followed by big writedowns in bank earnings…”

    Please, please start soon! The sooner the avalanche starts — boy, it would be nice to bury the bankers! — the sooner we can begin rebuilding, properly.

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