There comes a time when you just can’t go back to the well. When your citizens — in the words of Howard Beale from the movieNetwork — stand up and say “I’m mad as hell, and I’m not going to take this anymore!”
Has Europe reached that point? It sure looks like it to me … and that has serious implications for our markets. Here’s why …
German, Finnish Opposition Putting
Bailout Backers Up Against a Wall!
Bailout Backers Up Against a Wall!
Greece managed to wrangle a second, 109 billion-euro bailout program out of its European neighbors in July. But now, that plan is in serious jeopardy.
The reason? Opposition from Finland. The country is slated to put up less than 2 percent of the money for the bailout. But it’s saying it won’t contribute even that amount unless it gets Greek national assets as collateral!
Anti-bailout fever is running hot over there, with the country’s True Finns party putting pressure on bailout proponents just like the Tea Party is doing so here in the U.S. Finland is far from alone, too. Citizens of Austria and Germany are also getting fed up with the constant demands for more money for their profligate neighbors.
Another key threat?
The bailout is contingent on 90 percent of Greek bond investors agreeing to a debt swap to lower the country’s financing costs. But participation is reportedly much lower. That could cause the deal to fall apart, and risk other bailout programs for Portugal and Ireland!
Then there’s the issue of “Eurobonds” — one of the last, best hopes for a pan-European solution to the credit crisis. The bonds would put the balance sheets of every single euro-zone country at risk to support the weaker PIIGS countries. Advocates believe they will break the back of the debt crisis once and for all.
But Germany is having none of it, with Chancellor Angela Merkel insisting she won’t be “blackmailed” into backing Eurobonds. And the Germans have every reason to be worried! If they put their balance sheet at risk just to support countries like Greece and Ireland, it could drive German borrowing costs up by 47 billion euros, according to the Ifo Institution for Economic Research in Munich.
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| “That’s where we have to put up a clear stop sign and say we won’t do that.” — Chancellor Merkel |
Opposition from other countries like Austria and France is also running high, making the Eurobond idea look downright “dead on arrival” to me! That means the simmering crisis could explode again at virtually any moment, sending the euro currency and European bank stocks sharply lower.
Liquidity Is Not the Problem!
It’s Solvency!
It’s Solvency!
We’ve just seen a sharp rally in bank stocks. Warren Buffett has just thrown $5 billion at wounded institution Bank of America. Two Greek banks just agreed to merge in an attempt to staunch the bleeding.
So why am I not more optimistic here? Why am I not just throwing caution to the wind and loading up on financials? Because each and every step along the way, European officials have treated the issue like a liquidity crisis. But it’s actually a solvency problem.
Banks simply do not have enough capital to absorb losses on all the European sovereign bonds they’re loaded down with. Outright failures or dilutive capital raises are inevitable!
No less than International Monetary Fund managing director Christine Lagarde agrees with me, by the way. She just told policymakers gathered in Jackson Hole, Wyoming that the need to recapitalize is “urgent” and that “we could easily see the further spread of economic weakness to core countries, or even a debilitating liquidity crisis” without it!
So my advice remains the same:
Don’t listen to Wall Street’s siren song! Pare back your risk. Limit your exposure to financial stocks. Use rallies to lighten up on equities, and to add investments like inverse ETFs that will make you money when the next leg down gets underway!
Until next time,
Mike
http://www.moneyandmarkets.com/european-bailout-fatigue-spells-big-trouble-for-stocks-47059?FIELD9=2
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