Sense on Cents

With social unrest increasing in Greece, anxieties skyrocketing across the EU, and the Euro making new 12 month lows, the question begs as to whether this crisis within the EU can be contained. Is the EU, with the support of the IMF, willing to collectively underwrite the fiscal disaster currently focused within Greece? The German citizenry is showing very little appetite to subsidize this Greek tragedy.

While the EU’s political fortitude is a critical question, ultimately the reality of the mountainous debt levels must be faced. Global government stimulus has been able to mask, if not outright disguise, these debts for a period, but the debts themselves are not going away. How will the EU address this debt?

1. Devalue. That’s a given. It’s only a question of how and when.
2. Restructure. Look for more on this.
3. Default. Do not discount this reality.

All three of these scenarios do not portend a bright future for the Euro or the EU itself. Let’s revisit a commentary I first put forth in March 2009, “Why is George Soros Short the Euro?”:

Why is George Soros short the euro? Let me provide a synopsis of Mauldin’s and Jensen’s “Europe On the Ropes.”

Jensen initially provides a backdrop of the collective guilt across all market participants in this global economic meltdown. The U.K. government is targeted by Jensen for their total lack of fiscal discipline in the process. He further adds that the outlandish banking compensation was a direct correlation of the leverage employed. Jensen focuses on the preponderance of supposed AAA rated CLOs (Collateralized Loan Obligations) backed by corporate loans and credit cards. The leverage employed by the European banks dwarfed the leverage employed by U.S. banks.

To this point Jensen’s analysis is enlightening but not earth shattering. He then enters into the rate of expected defaults on the European banks’ balance sheets, the exposures to eastern Europe, and the specifics of mortgage borrowing by eastern European citizens from European banks. I started to get a little queasy.

Embedded in this commentary is a 2009 chart, the Country Vulnerability Scorecard, which highlights the debt burdens of global governments. The five western nations deemed most vulnerable when this chart was drafted were Iceland, Greece, Spain, United Kingdom, and the United States. The fiscal disasters within selected EU countries have elevated over the last year, but the dark clouds from massive debts on our economic landscape are only growing larger.

Athens today. London tomorrow? Washington next week?

For more on this topic, read a WSJ commentary, A Tale of Three Cities.

LD

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This entry was posted on Wednesday, May 5th, 2010 at 8:20 AM and is filed under Eastern Europe, Euro, European Union, General, Greece. You can follow any responses to this entry through the RSS 2.0 feed. You can skip to the end and leave a response. Pinging is currently not allowed.