Uber Alles? Nein!


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.

The above data and research was compiled from sources believed to be reliable. However, neither MBMG International Ltd nor its officers can accept any liability for any errors or omissions in the above article nor bear any responsibility for any losses achieved as a result of any actions taken or not taken as a consequence of reading the above article. For more information please contact Graham Macdonald on [email protected]