(This article was published in Cotizalia on May 26th, 2012)Another week and as part of our leaders think that the rest of the world is wrong, capital continues to fly away from Europe. €700m a day according to press. The credit and financial credibility of the Eurozone couldn’t be any lower. Yes, my friends, investors will not return if the numbers are not solid, and politicians cannot prohibit selling.

Eighteen European summits in two years. European politicians seem increasingly more detached from the real problems of the economy. How can they meet again without reaching an agreement on anything? They seem to give a message of selfishness to the public, and that they are cheating to investors.

We get constant calls to promote growth, which would be fine if they were not calls to encourage the same subsidized wasteful spending of the past. Funily enough, if the EU had cut part of its €141bn budget, out of which 45% goes to “employment and growth”, by today the continent would have a lot less debt and a lot more growth. In any case, I think that we will gradually see a more logical reform agenda for Europe.

We are outraged to see that Germany finances itself at near zero rates while Southern Europe countries finance themselves at 6% or higher. But instead of thinking that, perhaps, the Central European austerity plans work, the press and politicians say that Germany is going against us, “drowning” us.

We hear that the blame for the debt crisis should be pinned on Germany which broke the deficit limits in the early 2000s, which “obviously” led everyone else to go into a debt frenzy. Here nobody is to blame for anything. It’s like those people that stuff themselves with Big Macs and blame McDonald’s for their obesity. If a bank fails, blame it on the “ill will of the anglosaxon press.” If the stock market falls, blame it on Greece or hedge funds, or both. And the giant real estate bubble, the massive subsidy culture and the savings banks’ recklessness have Helmut Kohl to blame. Please

However, countries that have implemented austerity and budget control, from Estonia to Germany, are those who are better off today. We should not demonize them, but learn together how to attract capital and get out of this debt mess. Austerity -cutting giant political spending- and growth -not subsidies.

Austerity and growth are not mutually exclusive. Reckless spend and growth are.

From a market perspective, the only way to reduce risk premiums and attract investor interest is just moving towards a single tax system, and to contain government expenditure, which has done nothing but grow even in years of “austerity”. Public spending in the EU has not fallen in most countries between 2008 and 2011. In Spain it is still 4% higher than in 2008.

The graph below is devastating. Either we adapt spending to “pre-bubble” levels or the CDS will not stop rising.

Why we should not allow the ECB to become the worst hedge fund in the world

When we say that countries should receive more money from the European Central Bank we forget that it can not infect its balance sheet at the rate of one trillion euros per semester.

Germany, the Netherlands and the countries of central Europe are those who have to carry the financing risk. Not France, which has a serious debt problem. And if they close the tap, it will be bad. But if they open the tap too soon and too much it will be worse. Because they run out of water for the next fire.

There are several things we should know about the European Central Bank:

1. . The ECB’s current debt is monstrous. At 23 or 24 times its assets, with only 82 billion euros in capital and reserves. Of course, the Fed’s balance sheet is also unacceptably high, 53 times its assets … The big difference is that the capitalization of the Fed does not depend on severely indebted entities such as the European states. But as I always say, we should not copy the ones who do wrong and reclaim our right to do worse. Let’s remember that the U.S. is on the brink of a “fiscal cliff.”
2. . The ECB weakens with the losses incurred from its purchases of sovereign debt. We are talking about latent losses between 55 and 70 billion euros (source Barcap and Open Europe). Of course, many will say that there are no “losses” because the ECB has not sold the bonds -a “bull market” argument- but anyway we want to see it, systemic risk is increasing and does not dissipate by buying more bonds, as we have seen since November. In fact, losses have increased in 2012.
3. . The European Central Bank has already contributed to the stabilization of the European market, excessively aggressive and quickly. With more than 1 trillion. And the ECB should keep powder dry in case of future emergencies, because the future ain’t what it used to be, to quote Jim Steinman.
4. . Saying that “we must use the money of the ECB” is false because it is not disposable money. It is debt, which must be funded through more sovereign debt. The ECB Balance sheet growth goes also against our future tax bills.
5. . To those parties that demand that Europe should “capitalize “the debt of the ECB: Where will that money come from? Furthermore, it an indirect default that would severely impact the creditworthiness of all solid countries of the Eurozone.

(This article was published in Cotizalia on February 2012 and updated on June 17 for the elections)The exit of Greece from the euro and another default seems almost a certainty. An exit and yet another default.

The Greek state, which has more public workers than Spain with four times fewer inhabitants, has wasted bailout after bailout and continues to delay reforms, and now threatens to melt into a political debacle, with some parties asking to re-negotiate the treaty… After receiving the money.

I recommend you read the chapter on Greece from “Boomerang “by Michael Lewis to understand why the money that has been lent will not be recovered easily. But first and foremost, keeping this painful endless drama has no positive effect for Greece. It only helps, delays the pain actually, to the lending banks, especially German and French, which accumulate €138 billion of Greek debt.

No wonder that France and Germany, who keep €57 and €34 billion of Greek debt respectively, are those who insist on keeping the terminally ill in the euro at all costs, although the country’s GDP collapses at an annual rate of 4-6%, and debt to GDP is at 130%.

Rescuing Greece does not solve anything in a country that overspends 8% of its entire GDP every year, while revenues collapse and new expenditures appear every quarter. A bottomless pit in a system, the euro, within which it can not and will not recover.

And the difference between Greece and other European countries, like Portugal, is that its political parties are not accepting to make the needed reforms. The whole system is becoming almost a swindle of promised reforms in exchange for a bailout that never reaches the population (80% of the bailout money returns to the banks to pay interests) but the people do suffer the budget cuts, which happen everywhere except where they are needed (in the bloated political and public system).Rescuing Greece does not work, we have seen it many times. But would it really be a debacle if Europe allows Greece to restructure and exit the euro, staying in the euro zone as a member similar to Poland, with its own currency?. I always say that if Greece formally bankrupts it clarifies and limits the risk, and we can narrow down and isolate the problem.

Europe can not afford to pay the equivalent to 10% of Spain’s GDP every five months to Greece -to the banks, I must say- to get nowhere.

Given a scenario in which Italy has refinanced only 15% of their maturities for 2012 and Spain only 28%, many of the European Union officials fear that leaving Greece on its own would have a huge impact on the credit default swaps of countries.

The problem in Greece is not the problem of Portugal or Spain or Italy. Those are countries who have dealt in the past with significant challenges and dealt with them. Greece has not balanced a budget for decades.

The cost of rescuing Greece would be another 130 billion euros to start, plus more than 200 billion euros that Europe can consider gone. But Greece’s economy needs to deal with a much larger issue. The political debacle and corruption. So bailouts will not help. That is the Greek drama. And the same politicians, even under different party names, will not solve it. Because the bailout system keeps them alive at the expense of the people.Update for the elections

The Greek elections have scared so many countries that we hear cries to “study” the “possibility” of a concerted action by central banks if Greece leaves the euro. Such is the likely contagion impact.

The Greek election analysis has been done in the markets from a Manichean perspective. New Democracy are the good guys and the bad guys are Syriza. I am more interested in the economic impact of any outcome, and as such, I fear that Greek elections, no matter what happens, will deliver a result that will be bad in any way for European debt.

I say this because, either due to another bailout -and Greece has received the equivalent of 115 Marshall plans in the past years -or by default, Greece shows us the fragility of Europe’s debt web and the risk of covering “debt with more debt.” Greece is not the problem, it is part of it, but it can make a big impact on the global economy due to the exposure to its debt from other countries.

For starters, Greece will need a new additional injection of 15 billion within weeks. Remember in April 2010 when former Spanish president said that the country would gain about 110 million euros a year -yes, a year-with the loan to Greece? Now, neither loan nor gain. Donation.

To put it simply:

. If New Democracy wins , the conservatives or a pro-troika coalition, Greece will probably renegotiate the terms of the bailout, yet require a package of “growth support”-translation: debt- in infrastructure projects financed by the EIB. Financed might be a big word, as these will likely not be repaid. The “cost” of this option is estimated at 50 billion to 60 billion euros in 18 months.

. If Syriza -the left- wins or an anti-bailout coalition reaches government, they will threaten with leaving the euro, and option that could cost Europe between 300 to 400 billion euros, according to an analysis of the Eurogroup, or one trillion, according to Lukas Papadimos. And if they stay, they will force a revision of the austerity programs, an estimated cost of 150 billion if we assume the costs of stopping the adjustments and another partial restructuring of its debt.

. Of course, if Greece goes to a third round of elections, which cost the not inconsiderable amount of 35 million euros each, we should be ready for another hot summer.The reality is that no matter who wins, in Greece the scheme of a hypertrophied political state, spending and cronyism between government and party is the only one who does not suffer. And that any cost of the Greek outcome will be funded by additional debt from a Eurozone with fewer resources which finds itself increasingly isolated from international markets.

(This last update was published in Cotizalia on June 15th 2012)

From UBS:

If they were to leave the Euro, it is likely that a new drachma could lose half of its value when introduced. That’s consistent with other episodes of countries abandoning fixed exchange rate regimes – for example during the Asian crisis of 1997/98. A 50% depreciation of the currency means that Greek GDP in euro would be halved too. As a consequence, the debt to GDP ratio would double. This means that, in order to reduce the ratio by one third, our original target to make the trajectory “sustainable”, the haircut needed is now two-thirds. This simply doubles the loss for foreign investors. In the case of a ½ haircut, it would have to become a 3/4 haircut. In this scenario, the estimated cost for the European taxpayer of a one-third haircut is no longer €60.6Bn, but potentially €121.3Bn. The cost for the European taxpayer in case of a 50% haircut is no longer €91.0Bn, but €136.4Bn.Additionally, Target 2 imbalances would have to be added to the bill, this is currently worth 104Bn. We estimate that the total cost for European taxpayers in case of an exit of Greece would be almost four times more, at €225Bn.

From RBS:

eKathimerini reports that a new opinion poll suggests that the Greek elections will see SYRIZA in a face-off against New Democracy. According to the survey, SYRIZA would garner 28% in elections next month, while ND, which co-signed Greece’s debt deal with socialist PASOK but has long pushed for a renegotiation of the terms of the agreement, would get 24%. PASOK would come in third with 15%, according to the poll, which was carried out last week. Other opinion polls put ND ahead of SYRIZA, which are expected to clash in this election campaign.

Worth looking at HSBC’s solid report published on May 23rd on the implications of a Greek exit:

Devaluations can be really damaging for a short term that is already very difficult for the population:

Greece could run out of cash this month, despite its widely heralded second bailout.   http://www.cnbc.com/id/47700847

Interesting to see Credit Suisse Macro conference polling results: