Only this time, the ECB is already doing “whatever it takes.”
By Don Quijones, Spain & Mexico, editor at WOLF STREET.
With hotly contested general elections coming up in France, Germany, and Holland – where yet another upset could be on the cards – 2017 was always going to be a nail-biter for the Eurozone. That was before former Italian PM Matteo Renzi raised the prospects of fresh elections in the home of electoral chaos, Italy.
And investors’ nerves are fraying. The spread between the 10-year yields of French government debt and German government debt has already widened from 0.28% in October to 0.81% today in anticipation of French elections, to be held in April. According to Frankfurt-based Sentix research group, the probability that France could fracture the euro is also rising, reaching 8.4% in its latest survey of investor sentiment as concerns about Marine Le Pen’s threat to the French and European establishment continue to rise. It’s the highest level registered to date.
The poll, which was launched in June 2012, at the height of Europe’s sovereign debt crisis, surveys more than 5,000 retail and institutional investors from 20 countries about their expectations of Europe’s financial markets. The result of the latest survey is clear as day: the euro crisis is once again back front and center in investors’ minds.
A quarter of respondents believe that at least one State will abandon the single currency in the next 12 months. It’s the highest level since Brexit, when Sentix’s fear index reached 27.5%. The highest level ever recorded was during the euro zone’s peripheral debt crisis when it reached 73%. Ironically, no country left, thanks largely to Mario Draghi’s pledge to do whatever it takes to keep the euro intact.
But now, five years later, most of the Eurozone’s existential problems remain unresolved, despite the ECB having frittered €3.7 trillion (or roughly 36% of Eurozone GDP) on keeping the leaking ship — and the region’s biggest banks — afloat.
Hard as it is to believe, Greece is arguably in even worse shape today than it was when the term Grexit was first coined, six years ago. It cannot leave the Eurozone, but as long as it stays, its economy will continue to plumb new depths of depression. With no end in sight to the latest round of bailout negotiations, bank deposit flight is at its worst since 2015 as Greeks once again yank their funds out of the banks in anticipation of another face-off with the ECB.
Greece is just one of many seemingly intractable problems the Eurozone faces. There’s also Italy, the world’s third most indebted government which somehow hopes to rescue, with public funds, a banking sector that is home to an unspecified number of insolvent institutions as well as roughly a third of the EU’s entire stock of non-performing loans. This is a problem that will cost, at the very least, scores of billions of euros to address.
But even if that happens, the Eurozone’s biggest problem — the economic and financial heterogeneity of its 19 member nations and the complete absence (according to some, by design) of a fiscal transfer mechanism — will continue to fester. Even on the off-chance that Germany were to suddenly sanction a fiscal transfer scheme, it’s probably already too late in proceedings for it to change the course of events.
Mark Blyth, a professor of political economy in the U.S. who was one of very few academics who correctly guessed three of the biggest political shocks of 2017, Brexit, Trumpism and the no-vote in Italy’s constitutional referendum, has warned that 2017 could even be the year that the euro ceases to exist:
For all of the sturm und drang (German for “storm and stress”) about Brexit and whether Britain should have left, it might actually be the case that the EU ceases to exist before Article 50 is invoked. Think about it this way: you have an election coming up in France. It’s entirely plausible the National Front will win the first round. At that point everyone in France is meant to organize a giant blocking campaign to stop them being elected. That would mean everyone on the French left has to vote for someone who basically wants to bring Thatcher’s menu to France, and that’s after eight years of stagnation. That’s going to be a very hard sell.”
Whether it’s France, Italy or Spain, Grexit, Brexit or Nexit, a ressurgent Doom Loop, banking collapse or the Eurozone’s Target2 imbalances, something will eventually give.
The time-honored game of extend and pretend is losing its magical effect, even in the short term. Ever since the global financial crisis exposed the chronic shortcomings of the European Monetary Union and Europe’s banking system, the EU, with the ECB doing most of the arm work, has been frantically juggling so many intractable, existential problems for so long that it’s often assumed, particularly in the Brussels bubble, that it will be able to continue to juggle them ad inifinitum, regardless of how many new problems are thrown at it to juggle.
But investors – among many others – are once again beginning to have serious doubts. Only this time, the ECB is already doing “whatever it takes,” and it’s not working that well anymore. By Don Quijones.
Turns out, Italy’s banking crisis is not fixed. Read… Is that Desperation Hanging Over Europe’s Banking System?
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Extend and pretend + head in the sand describe the management of the Eurozone and the acceptance that investors have for the management. It’s quite obvious the money printing will never stop, nor will the rate subsidization or the debt monetization. It will certainly end badly since forced reorganization will be cheaper and faster than actual repayment or allowing rates to rise via political decisions.
Nobody know when this will happen. Some are in denial, but it will happen.
My question is “will there be a foreseeable order to the collapse of the house of cards?” or will it just be one thing followed by another. Since it will have to be a restructuring, what form will it take?
A Russian oligarch just took massive losses, in the $100’s of millions, on art he purchased from an art dealer who defrauded him. He unloaded the art at auction and is rich enough to absorb the $100’s of millions in losses. Other owners of art by the same artists will now suffer losses as well, even as passive owners, because the Russian has repriced the market at auction.
Yes, I do have a point in bringing this up. This is not that different than what is going on in the debt markets. At some point, somebody that can afford to take a loss will. And then everybody else will suffer the consequences.
Mark to market is a good idea if it happens periodically in short intervals, but the can has been kicked down the road for a very long time.
“At some point, somebody that can afford to take a loss will. And then everybody else will suffer the consequences.”
Eu debt, unlike art, has maturity dates, and is State based
We are already seeing northern Eu banks, not willing to lend to club-med banks.
Next logically there will be buyer short falls at auctions of, french, greek, and other club med debt.
Along with demands for much higher return’s.
Before somebody really puts the cat among the pigeons, and like the oligarch, publicly dumps a load of Club-Med Debt, way below market.
Mario is there to buy up all the Club-Med debt and people are selling, selling that to move their money into the North of Europe.
Mario’s solution is causing problems in the Target 2 imbalances, its just not being reported much.
A rare report:
It is a premium report but you can read without paying, just register and you get access to one free article, this one.
very simular to the last telegraph link posted her and in fact all telegraph articles.
They dont tell us anything that isn’t common knowledge here at wolf street.
I think they get their facts from the don, and simply rewrite most of his articles.
“Mario is there to buy up all the Club-Med debt and people are selling, selling that to move their money into the North of Europe.”
We know and they have been doing this, and smaller people have been simply moving their cash out of club-med bank’s, since the first greek bail out This is why the NPL ratios are so bad. Just like the original greek bank Jog, it has never really stopped since then.
Most people with money in club-med bank’s, owe them, much much more, than they keep in them. And they are still quietly putting something out of club-med state, and bank’s way, every month.
Anybody in club-med who dosent do this, is insane, financially suicidal, or destitute.
Not likely. Each country will act in its own best interests. My guess–some countries will align with the U.S., and others will align with their Eastern trading partners. Look at who German aligns with; that will tell you the future of the $$$. I seriously doubt the Germans will align with Trump. He, and Super Printer Mario, are going to print when nobody wants their sovereign bonds. Somebody please tell me what IDIOT would buy a US T-bond??? Mario and Janet Felon are the only answers. It won’t collapse overnight, but it won’t take 8 years for investors, firms, and constituents figure out their money in the bank is at risk.
China is Germany’s largest trading partner, US fell to third place. The US has already been trumped.
Who’s rattled? Dow 21K. LOLOL. As I predicted, Trump made a number of vague promises and it’s off to the races.
Trump has learned well from the Fed.
Do you remember the old salesman pitch “Our loss, your gain”?
One of the reasons the US stock market has been going so high is because of the flight from security markets. While at least in the US yields are visible with the aid of a magnifying glass, in Europe they require a SEM, if they exist at all. Very much like most other people I am not going to buy bonds from a rapidly putrefying Italian or Austrian bank if the yield doesn’t reflect the very real risks I am taking.
So what do we do? We sell our securities and buy stocks, especially US ones, because in the land of the blind the one-eyed is king.
European investors don’t care if Caterpillar sales are getting literally mauled by their Asian competitors or if Tesla has been bleeding red ink for almost fourteen years: the important thing is to get a liquid asset denominated in US dollars damn right now.
Call it a flight to safety, not so much because there are fears of a EU breakup, but because the game the ECB has been playing is the exactly the same as that played by the People’s Bank of China.
“but because the game the ECB has been playing is the exactly the same as that played by the People’s Bank of China.”
Main difference being in the Eu you can still tally up whats in circulation and has been printed by lending.
In china you cant and in china the State has been Clandestinely Physically Printing Cash, to pay it’s bills, for decades.
High level chinese trade and project financier (as in Hundred’s of billions) I recently had lunch with “If you could get a number on the amount of cash in circulation in china at the most it would be only 50 % accurate”
What can potentially trigger the collapse? Can this be a fall in German exports, as this was what has sustained the Eurozone since early 2000s. The German exports balanced other Eurozone countries’ deficits. So if countries like US, Britain, Russia and China take actions againt German exports, the whole building may collapse. It does not look that way at the moment with weak Euro really helping, but Germany already has tense trade relationship with Russia, Britain and now the US and squablled with China over investment.
That’s a very prescient observation. The Germans have benefited from a unique confluence of events and balance of power politics in recent years. This is about to change in the coming period. Another factor that has helped the EU muddle along in recent years, probably even more than the ECB money-printing did, has been the spectacular collapse in energy and commodity prices. As these trends reverse in the coming years, the EU and its member states are in for a rough ride.
Well, let’s look at the bright side. The princess of Brussels were on an expansionist march to absorb anything that bordered on their empire. Turkey was in the pipeline, and on. Now, holding it together can counts as a success.
A small note, Brussels has never been too interested in adding Turkey as a member, they have always found ways to stall beginning negotiations with Turkey. It has been previous administrations in the US that has been pressurizing Brussels on Turkey as a member of the EU….
Shush dont tell him realities like that, he will start trotting out more conspiracy theories again.
The Wanabe sultan, has been moving further from NATO when not trying to drag NATO into wars to protect him. To the extent of ordering missile systems, from non NATO suppliers, that are not compatible with NATO system’s
P45 would like to withdraw from the syria turkey mess with face intact.
I dont see the Eu, or the Wanabe sultan, helping P 45 in that objective.
“It cannot leave the Eurozone, but as long as it stays, its economy will continue to plumb new depths of depression.”
I agree with Dimitris Kazakis:
Greece MUST default on all debt, leave the Eurozone and once again start printing Drachma. Times will be tough for a few years, but after those few years Greeks will be far better off than they are now and infinitely better off than if they have the rest of Greece’s valuable ANYTHING stolen by the Troika.
“Greece MUST default on all debt, leave the Eurozone and once again start printing Drachma.”
Dippy Tippy and his mad finance minister tried, Germany was even offering a big fat golden handshake if they did.
The people said NO.
As they do not want devalued every week drachma, again.
So now the greek state is stuck, with how to bring this about, over the objection’s of the people.
To do this they need to make greece under drachma, look much more attractive.
Which means they must make greece under Eur, much much more, unattractive and unpleasant.
Expect more greek gnashing of teeth and fist waving at Germany, followed by more pension, social service, and benefit cuts, for several more years.
Untill the Objections of the people are removed.
Of course anybody who has any money in greece. Will have it in Eur outside greece long before then, and all greek politicians will have their pensions guranteed in, or indexed to, the Eur.
Well Mario has said if you like your EURO you can keep your EURO however if you want to leave you have to pay the tab . Don’t see many countries taking the latter approach .
Mario – leave and pay the tab
What’s the value of debt if the ECB bought it using printed money? The cost basis is $0.00. Unlike you or me who pays out of savings. The tab associated with ECB owned debt must be $0.00, otherwise the ECB records a gain, or simply zeros out the transaction that created the $0.00 cost basis euros. (note to germany – lot of room to kick the can here if things go south)
Mario has a false argument. Not to say he can’t get tiring with it and not to say lots of Euro-cronies won’t pile on with him.
It started go wrong straight away, as an assumptions was made that Germany would bail out all debt, leading to excessively low interest rates across the periphery.
The comedy of errors that is the Euro.
How is the system supposed to work?
Bankers are given the privilege of creating money out of nothing for loans which they can charge interest on.
In reality it provides a mechanism for you to borrow your own money from the future and the interest you pay is the charge for this service.
You pay the initial sum, plus the interest, back in the future and get to spend that money today on a house or a car or whatever.
This mechanism has an interesting effect on the money supply as the money comes into the economy immediately and is only removed slowly by the repayments. Very slowly, in the case of long term mortgage debt.
For large loans banks set the interest rate depending on the risk assessment of the loan.
Loans to countries are large loans and the interest rate is set depending on the risk of default.
Greece and many Club-Med nations used to have to pay high rates of interest as there was a higher risk of default.
Then The Euro came along.
The ECB was helping Germany get over its dot.com bust when the Neuer Markt collapsed by 97%.
The financial sector made an assumption that everyone would be bailed out by Germany if they got into trouble.
Interest rates were set at very low levels across the Euro-zone, due to the incorrect assumption of risk by the financial sector and the ECB’s efforts to help Germany.
The Club-med and Ireland boomed, they had never seen interest rates like these, borrowing was so cheap.
Interest rates in Greece used to be about 18% with the Drachma, it was time to party and stock up on German luxury goods like the Porsche Cayenne, a great favourite in Greece at the time. It was party time in the Club-Med nations and Ireland.
Housing bubbles inflated in Spain, Ireland, Greece and Holland.
Germany itself was in a state of shock after the dot.com bust, it didn’t borrow and tightened its belt becoming more competitive.
All this new debt elsewhere, creates money which floods into these economies increasing the money supply, prices and wages. Their competitiveness is going down compared to Germany, but it doesn’t show up as they are consuming with debt that, in itself, creates money that is pouring into the economy.
They thought the good times would never end, until they did.
A hurricane blew out of Wall Street and laid low the once vibrant global economy. The Euro-zone nations had to load up on debt to bail out their banking sectors.
The financial sector realised that Germany wasn’t going to be bailing everyone out and re-assessed the risks and raised interest rates accordingly. The sustainable debt became unsustainable and the housing booms turned to bust.
The Euro-zone crisis was in full swing and things were allowed to run for quite a long time before the ECB swung into action and bought down interest rates at the periphery and a lot of damage had already been done.
The EU took the debt off the private banks and placed it on EU taxpayers, they were still very concerned about the health of their banks after 2008.
The vast majority of Greek bailouts just return to the EU as repayments on the debt and less than 10% goes to Greece.
There is plenty of evidence to suggest austerity doesn’t work including the IMF’s own forecasts for Greek recovery with austerity.
The IMF predicted Greek GDP would have recovered by 2015.
By 2015 it was down 27% and still falling.
There are many players in this comedy of errors but Greece and the Club-Med nations get the blame.
“Greece and the Club-Med nations get the blame.”
Greece gets the blame wrightfully, for 1 simple reason.
It lied blatantly to get into the Eur, and the frauds that went with those lies, took down the whole club med banking system when they turned the 2008 US event into a global financial crisis.
The losses from the greek fraud’s are what make the whole club-med banking system so unstable today.
Ultimately the club med banking system can not absorb the losses from the greek fraud’s. Unless large part’s of it are liquidated and the losses passed to stock and bond holders.
The ECB and various Club-med administrations, have been trying to avoid this for nearly a decade now, to no avail.
The NPL’S no longer have greece written on them, but utimatly they can not be absorbed, due to the greek losses, which previously ate all the capital.
Greece and china both have a history of doing this sort of thing, to the international business community and other nation’s.
Athens first deployed (or invented) western sovereign default. Something they may have copied from china, the inventors of eastern paper money, and global sovereign default..
The US created the global financial crisis with a leveraged up real estate bubble.
Greece’s great fraud could have been paid off with a tiny fraction of the QE that has been pumped into the global system.
The Euro was a political project and it was known that some on the periphery were cooking their books.
If Greece had been TBTF it would have been bailed out like the banks.
You don’t seem to be in possession of any of the facts.
“You don’t seem to be in possession of any of the facts.”
You best look in the mirror.
The greek frauds caused the Euro crisis, which joined with the internal US 08 correction, and caused the GFC.
Just as the collapse of an Austrian bank. Caused/triggered the 1929 global depression, the US gets the blame for.
The US 08 correction was an internal US matter.
greece turned it into the GCF, not by the amount it owed.
But by causing Euro inter-bank, and intentional inter-bank lending, to lock up.
The international financial system runs on, trust, and confidence, not $/Currency value, or volume.
greece destroyed that confidence and trust, to the extent bank’s refused to lend to each other in the Euro zone and internationally.
greece turn the US 08 internal correction, into the GFC. By destroying trust and confidence in the Euro and international bank lending mechanism. Simple fact of history. Denying it, wont change it
We are obviously living in parallel universes.
Your desire to whitewash greece and blame the US for the global damage Europe, and in the GFC case greece not Austria as in1929, caused would make it seem so.
It’s different here.
When the club-med bank’s finally implode.
That will be America’s fault as well wont it.
No matter what damage mainland Europe does to the rest of world, its never their fault and the US or another country, outside mainland Europe, is always responsible, in your universe.
Dow up almost 350 points, investors are REALLY rattled….. with excitement that is.
Seems like the only ones rattled are Doomers.
What the stock market shows, time and again, is that consensual hallucination works – until it doesn’t.
Well said Wolf. I have been very conservative in the percentage of equities I’ve held for nearly a year while the markets defy logic and climb to new highs. My risk to reward is lower, but watching the market march up is a bit frustrating.
$ US, safest, Unsafe haven, again???
Folie à deux (/fɒˈli ə ˈduː/; French pronunciation: [fɔli a dø]; French for “madness of two”), or shared psychosis, is a psychiatric syndrome in which symptoms of a delusional belief and hallucinations are transmitted from one individual to another. The same syndrome shared by more than two people may be called folie à trois, folie à quatre, folie en famille or even folie à plusieurs (“madness of many”).
Thank god french ceased to be a Major language of growing use, anywhere, but in the mind’s of french speakers.
soon It will cease to be the major language in france. Being replaced by Arabic or Farsi.
Well the moniker of “doomers” maybe somewhat of a mischaracterization. I like to think of myself as a realist . To wit: look at the CAPE ratio. It has been only this high a few times in history . BUT as MR
Shiller admits it doesn’t take in the prevailing interest rate . Both W. Buffet and J. Yellen have argued that the market is not overvalued because of low interest rates . Low interest rates make the present value of future corp. earnings streams HIGHER today. So lets see ,when rates rise, what happens. The present value should “realistically” decline . To me PV is a fundamentally sound measurement of stock prices.
Sounds like you should buy some stocks then! LOTS of stocks. :)
Greed and Selfishness unfortunately still rules the day. My Dad fought with General Goerge Patton in the 3rd Armored Division – Normandy, Battle of the Bulge. In August of 1945, my Dad was 25 and he wrote to my Mom that many young men died because of greed and selfishness and that many men should have been born animals instead of humans. Nothing has changed. In 1500BC, Egypt invaded Alleppo, Syria. What has mankind learned- NOTHING!!
The stock, bond and real estate markets are significantly overvalued as they are throughout the world. Income inequality has risen drastically and I hope that WW III will not follow when the masses turn their sights on the establishment. A pattern that has occurred throughout history