This special guest commentary was written by Daniel Lacalle.
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"You can fool some people sometimes but you can not fool all the people all the time." |
The latest from the European Commission is to package debt of European states in structured products that would be sold to private investors. They will be called ( I swear ) European Safe Bonds. Come on, like subprime mortgages? As Margaret Thatcher said, when you have to say you're a lady, it's probably that you're not.
The European Union thinks, like so many, that it hides risk by joining German bonds with Greeks or Italians. And it is false.
Just as combining unpayable mortgages with healthy ones did not reduce the risk, it increased it, creating debt packages does not make the Greek, Spanish or Italian debt more solvent, but the German's riskier.
Eurobonds were already a very bad idea. Mutualized debt among all states when the vast majority not only do not have credit responsibility but reject it. It is a time bomb, an incentive to waste and pass the problem to others. No, in the United States there is no such concept that is being sold to us as the panacea for Europe. Detroit goes bankrupt and is not rescued by Texas, not even by Illinois, its state. California goes bankrupt and is not rescued by Nevada.
Sharing the risk when neither responsibility nor penalty is imposed is a collective suicide.
Now it occurs to them to bundle debt from several irresponsible states financially in a "safe bond" through a structured product, the ESBie. It had not occurred to anyone before, of course.
"Only private investors would share the risk and the losses," reads the Commission's draft. In the same communication that explains this new subprime example, it shows that in reality what is sought is to pass risk on to unsuspecting private investors who will believe that they are safe bonds and, when it explodes, they will assume the losses.
Standard & Poor's has already stated that it would not grant ESBie (light eurobonds) the highest rating, which is what the European Commission wants and, at most, it would have the qualification of the worst quality bond of the upper section. The rating agencies have already made the mistake of accepting unjustified credit ratings for having a supposed state guarantee (Freddie Mac and Fannie Mae, the largest mortgage originators were and are public).
See the graphic. Do not believe that the senior section (70%) includes German bonds only, but it includes French or Italians.
Italians? Isn't it a surprising coincidence that the Commission is launching talks about ESBies just when Italian risk is triggered by the coalition of extreme left and extreme right?
Recall that the economic program of the United populists includes an increase of between 109,000 and 125,000 million euros of additional deficit , and independent analysis -Fidentiis- estimate some € 138,000 million by 2020.
But remember that both parties propose "magic" ways of not repaying the debt, or hiding it (so that it does not appear in the official data of what the ECB buys) and propose "mechanisms" for the "orderly exit" of the euro.
Italy has shown that accepting the argument of non-existent austerity and allowing imbalances to increase has only created more demands for redistribution of the money of others.
The nonexistent austerity has led to madness. Like those children who receive a treat if they stop behaving badly, they continue to behave worse because they think they will receive more candy.
The funny thing is that millions of Europeans think that their pensions, their public salaries and their state would be maintained or better off by defaulting and leaving the euro. There is not a single case in history in which a default of Italy's size has not generated huge cuts. There is not a single case in which the welfare state has not been cut, in real terms, upon the devaluation.
Italy faces about 350,000 million euros of debt maturities, more than 300,000 million difficult-to-collect loans and approximately 65,000 million debt maturities in euros from the best-known Italian companies, in the next six to eight years.
Default would mean the bankruptcy of social security, pensions, public salaries and savings (since the main unpaid would be the Italian savers). The bankruptcy of the banking system and rising risk premiums would lead to the drying up of credit to companies and families.
The problems of Italy or Spain are not solved by destroying the country. But it seems almost naive to me that the European Commission thinks that it is going to place "safe" bonds. Meanwhile, politicians think that two plus two add up to twenty-two.
ESBs are a new demonstration of how little Europe understands risk, markets and reality.
EDITOR'S NOTE
This is a Hedgeye Guest Contributor note written by economist Daniel Lacalle. He previously worked at PIMCO and was a portfolio manager at Ecofin Global Oil & Gas Fund and Citadel. Lacalle is CIO of Tressis Gestion and author of Life In The Financial Markets, The Energy World Is Flat and the most recent Escape from the Central Bank Trap.
