One widely held misconception right now is that Germany is
carrying a broken Europe on its back. My business partner, Paul Gambles,
explained this to all the participants in Wednesday night’s inaugural MBMG
‘Squawk Back’ that the reality is very different - a theme that he had
previously outlined to CNBC’s Squawk Box team last month. For those interested,
Paul is a regular guest on CNBC and offers an in depth insight on the global
economy and how it is expected to perform.
Paul went on to say, “So we have the EFSF rescue fund going
to the market with some six-month bonds. I think yields can be manipulated to
remain within reasonable levels, but it depends who’s actually pulling the
trigger and who’s doing the buying. One thing that I think is very interesting
is that the EFSF is starting to look more and more like a sub-prime CDO these
days. In the years running up to 2008, we had all this junk, and you could put
BBBs and CCCs together and call them AAA. S&P clearly learnt the lesson from
that and they’re not going to get caught in the same way again. Sadly, Fitch’s
and Moody’s seem to be a little bit slow to pick up on the same thing, but the
EFSF is just starting to look like a sub-prime CDO.”
Paul continued, “I don’t think the AAA governments want to
put any more into this. I think they’ve made that very clear. I think again,
going back to December 9th, going back to the Euro deal that was done, Germany
wants to have absolute control of what goes on in the Eurozone. It wants fiscal
control without the fiscal compact. It wants to set all the rules; it wants
austerity, but it doesn’t want to ultimately carry the liability, so I think the
idea that Germany is going to put more into the EFSF is unlikely, but it may,
behind the scenes, do much of the buying.”
He then stated, “I think the collective fiscal resolve people
talk about is the last thing we need. What that’s going to do is to reinforce
the fiscal policies of the last ten years of the Euro and what we’ve got in
Europe (and Nouriel Roubini probably explained this better than most) what we’ve
got is a symmetrical problem. Germany is producing all the growth; it’s got all
the competitiveness; it’s where all the wealth is going to. That’s being funded
by the periphery with all the debt they are having to take on board, so a lot of
people have got a mistaken view on Europe. It’s the periphery that’s been
carrying Germany for all these years, not the other way round. We either need a
transfer of wealth from Germany to Greece to allow that kind of transfer of
competitiveness back to Greece, which isn’t going to happen in a million years,
or the only other option is to break the system and start all over again, and to
us that means the peripheral countries leaving the Euro.”
A few things are happening. One is the ratings downgrade was
heavily telegraphed and therefore people were expecting it; it was not a massive
shock. And the other thing is this division between the ratings agencies, and
the fact that Fitch’s came out and said they guarantee that France will be given
a AAA rating for 2012. This is nothing short of absolutely bizarre. How any
ratings agency can say that I just do not know. What was Bill Gross’s comment,
that ratings agencies are full of people with MENSA IQs of 160 and common sense
IQs of about 60? Unless they have got a crystal ball, how can they say France
will be AAA?
The EFSF’s AAA guaranteed 271 billion Euros is probably
enough to come to the rescue of Greece in the next couple of months. On the face
of it, it should also be enough to save most of the periphery over the next
couple of months. It is not enough to go beyond that. We have been saying all
along, what you need to make Europe solvent is a transfer of about four to five
trillion Euros. That is what it takes to recapitalize the banking system so it
is capitally adequate. That is what it takes to fix the broken sovereigns so
that they get to a level where they are sustainable and they are repayable. We
are not seeing permanent capital of four to five trillion. The EFSF was never
that. It was only ever a stop-gap measure. The stop-gap has now got a little bit
smaller. I do not think there is any way to raise four to five trillion. The
question is how long can they keep raising interim money that keeps the game
going before the whole thing falls apart?
Germany’s worry is about being sucked down by defaults and
recessions across the Eurozone. If you take away that source of revenue, that
source of exports, you are taking away all the things that have boosted the
German economy for the last ten years and then things, all of a sudden, start
looking pretty naked.
A muddle through scenario is possible for a while but then in
a year or so, we will have got austerity in all these places, and austerity in
the periphery is not going to help anyone; we need growth in the periphery or
else the periphery falls apart, and if the periphery falls apart, that is what
will bring Germany down. If Europe thinks it is suffering now then wait for that
to happen. The French will be lucky to get any rating at all.
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