Categories: General Market Commentary / Precious Metals
Topics: General Market Commentary / General Precious Metals

The Proposed Euro Bond Issue to Bailout ECB

COMMENT: Well Mr. Armstrong, perhaps you are wrong at last. It looks like your meetings in Brussels that quite a few people noted you shuffling around town did have an impact. Looks like your constant warning about the structure of the euro’s failure is being corrected. Looks like you did make a difference. So congratulations on being wrong I suppose.

WH

ANSWER: Perhaps. But it has taken 20 years to make this point. Granted, the recent proposal to create a debt for the Eurozone is a compromise, but it is still not a consolidation of the national debts of Europe. This new compromise proposal from the EU Commission shows that they are listening at last but not for the reason I have been warning about. However, I would not say I am wrong. What I have always said is only when the collapse becomes eminent do we see the political change. My point is no change comes without the pain and typically only with the crash and burn. People who want to pretend they are advisors to government are usually bullshit artists. Government will NEVER listen to anyone if you try to get them to act without pain. Now this maneuver is not what it appears. It’s a bailout for the ECB.

The EU Commission intends to issue securities that “bundle” the entire Eurozone debt. So in other words, these will be the CDO instruments for Europe. Instead of bundling mortgages and assuming that the collective process will somehow be worth more than the individual parts, that is the compromise here. The securities are to be launched on the market as a “European Safe Asset” in order to attract the euro government bonds to investors. This is not quite what I had proposed from the outset. My proposal was they should have consolidated all the debt at the beginning, thereafter each member state would issue its own state debt as in the USA. But they were trying to sell the idea that a single currency would produce a single interest rate for all. That is what I warned them would NEVER HAPPEN.

This comprise proposal is ​​consolidating government bonds into asset backed securities (ABS). This is intended to pack the national government bonds into securities in order to ensure the financing of the states even after the end of the ECB’s buying-up program. Draghi has created a huge problem buying 40% of the government bonds. Who will buy when the ECB stops?

This is the crash and burn. The EU officials hope and pray that this scheme will increase the demand for governments’ debts of the weaker economies within the Eurozone. They also hope that this will secure the reserves of the European banks where right now a good stiff wind will blow them over. This, they hope and pray, will better diversify bank risks by diversifying their portfolios and ignoring political problems emerging in the south.

This is still a half-hearted measure to move toward federalization of Europe without consolidating the debts, which they fear will still be rejected by the North v the South. Wolfgang Schäuble had said that he no longer opposes a transferunion in principle and this ABS market has dropped sharply post-2007 because it was a subprime crisis. So here the same idea behind the mortgage crisis is being applied to the European debt. What is dangerous here is that the opposite of the original idea behind a single currency will unfold. Originally, they pitched that a single currency would create a single interest rate look at the United States. I warned that was only federally and you had to pick up the rug to see that the 50 states were subject to their own credit rating. Under this scheme, the idea of creating an ABS instead of consolidating the debt runs the risk that countries like Germany will find themselves (1) no longer the target for a capital flight among Eurozone states, and (2) that the overall interest rate will rise because of the lower quality being included. Therefore, you will not achieve the lowest rate for all as initially proposed back in the ’90s, but rates will rise to reflect the risks in Southern Europe.

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