Gold News

Beware Europe's Debt Volcano

Collectivizing the debt just lets the problem to grow bigger...

DO NOT underestimate what's happening in Europe. It's like a financial super volcano that's been spouting off steam for the last 18 months. Fiscal deficits at the periphery of the European Union were the problem last year. Now the problem is whether the whole European project can even survive, writes Dan Denning, editor of the Daily Reckoning Australia.

Yes, yes. That probably sounds a bit melodramatic. But super volcanoes are serious issues. And more seriously, this is where we're at in the evolution of the Global Financial Crisis. The solvency of the European project is in doubt. 

The chance of an immediate eruption seems to have diminished. The European Central Bank re-activated its Securities Market Programme last week. The SMP bought nearly $31 billion in 10-year Spanish and Italian government bonds. That brought interest rates down from nearly 6% to around 5% for 10-year Spanish debt.

But all you have to do is look at the numbers and you'll see that something in Europe is going to blow. Europe's currency union could blow. National fiscal policy could blow, if the Eurobond comes into play. And the tempers of millions of Germans and French could blow if Europe collectivizes its liabilities.

The trouble isn't Greece anymore. Its second bailout of €109 billion was more than covered by the original European Financial Stability Fund. That fund was funded up to €750 billion. About €420 billion of that is already committed to Portugal, Ireland, and Greece. That leaves €300 billion. And that used to be a lot of money.

But it's not nearly enough to cover the refinancing needs of Italy and Spain. Those two counties require nearly €750 billion in refinancing and new deficit spending in the next two years. And let's not forget that European banks — stuffed with government bonds — could require as much as €250 billion in order to be adequately capitalized, according to Britain's Telegraph.

The EFSF is not equipped to bail out Spain, Italy, and all of Europe's troubled banks. These deficits are beyond the ability of Europe's nations to fund by themselves. They must become one borrower, in financial terms, anyway, to lower the cost of borrowing and hit the target.

Europe has a $13 trillion economy. If you collectivize the debts of the various national governments, they amount to about 87% of GDP. That's a big number. But it's not the 90% Rogoff and Reinhart have flagged as the point where debt drags on the economy. And the cumulative fiscal deficits are just 4.4% of GDP, thanks to sounder fiscal policies in Germany.

Of course that's all just hocus pocus. The only way to make Italy and Spain's problems smaller is to express them as a percentage of Europe's economy. It's a parlor trick. It's also the final, logical extension of the idea of a collective Europe.

We're not banging on about it because we're for unemployment, hunger and poverty. We're banging on about it because the very idea at the heart of socialist democracies — that everyone can live at everyone else's expense — is literally bankrupt. In Europe, equality now means everyone will get poorer together. Shared sacrifice means private wealth will be confiscated by the State and rationed out until there is nothing left.

You'd expect that before we get to that point, at least one country is going to pull the pin on the whole project. It's either that, or drink the Kool-Aid and join in the mass economic suicide. Hmm.

By the way, all this talk about austerity is garbage. In most cases, politicians are talking about lower rates of growth in debt, not an absolute reduction. They are unserious and unfunny clowns. Most of them are probably regretting they ever ran for office and hoping they have siphoned enough money into their Swiss bank accounts to get away before it all goes cactus.

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Best-selling author of The Bull Hunter (Wiley & Sons) and formerly analyzing equities and publishing investment ideas from Baltimore, Paris, London and then Melbourne, Dan Denning is now co-author of The Bill Bonner Letter from Bonner & Partners.

See our full archive of Dan Denning articles

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