Stunned disbelief

How can anyone have any faith at all in the so called ‘technocrats’ to resolve Europe’s problems?

After watching CNBC’s Michelle Caruso-Cabrera interview Greece’s new prime minister, Lucas Papademos, our reaction to the unfolding situation with Greece and with the Euro as a whole was stunned disbelief.

As my business partner, Paul Gambles, told CNBC’s Martin Soong, Lisa Oake and Sri Jegarajah recently, “If I were Greek, I would be on the streets rioting because I think that’s the only appropriate response. There is an unelected prime minister installed by what we thought at the time was the ECB and the core of the European Union, but what we now know was Germany. There is a technocrat with no mandate, installed by Germany, who is part of a mechanism that denied the Greek people the referendum that they had been promised on the Euro, and who stands there and tells the world, ‘The Euro is what everyone in Greece wants.’ But if he looks out of the windows; there are thousands of people on the streets of Athens who don’t agree with that.”

There are a million people in Greece living below the poverty line who are actually starving on a daily basis, and Papademos sits there and says, “We need this adjustment process, and yes wages are going to fall, but by the end of it we’ll be okay.” This is a multi-year process. For Greece to become competitive is probably going to take five to ten years – at least. The people are not going to go along with it. They have been promised early retirement and lavish pensions. These are now nothing more than pie in the sky.

The Greeks would not have gone along with it even if they had elected the people in charge of it. We have been saying this for a period of time, and it is going to be painful in the short term which is why politicians do not want to do it, but the only way out for Greece is to leave the Euro.

People wonder exactly how this will happen as there is no provision for this type of scenario in the European constitution, but the EU does not have a constitution any more. It was torn up and buried on December 9th by Germany and France. The EU has no legal mandate.

Greece should actually just leave. It should re-introduce the Drachma and Drachmatize the Euro debt. There are actually two really good play books for this. We were all here in Asia in 1997. We saw what happened. Yes, it was six months of pain, but it was a pretty sharp recovery after that, and South East Asia has done very well. ASEAN is in the situation today where it does not have debt problems.

But there is actually an even more current example and it is a European example. Iceland. It devalued its currency, and yet Iceland had one of the strongest growth performances of any economy in the third quarter of last year. Iceland has started to adjust. It has not got anywhere near as far in adjusting yet as it needs to, but it devalued its currency and because of that it is starting to write off debt and assets, and actually starting to grow again. Iceland grew at 3½ percent in quarter three so it, at least, seems to be at the start of a path to recovery.

What we are seeing now is a situation where everything is politically driven. The dynamic is that Germany is now in charge of the cheque book. That is what happened on December 9th when we got an agreement that everything can be done in bi-partite deals now. If you need to borrow money, you go to Germany, and it is Germany who sets the conditions that will apply.

In our office, we have actually stopped referring to Angela Merkel; we now refer to her as Alaric Merkel. Alaric was the king of the Goths, who in the 5th Century marched on Athens, didn’t get into a war but surrounded Athens and starved the city into submission, and then from there, in 410, he marched on Rome, surrounded Rome and starved Rome into submission. To me that is what’s happening in the Eurozone right now. We have got Germany dangling the cheque book, calling the shots, making all the threats. But how long will everyone else go along with this?

So the current offering of 3% on 20 to 30-year bonds is really a bribe. It is an iron fist inside a velvet glove. What are the options if you don’t? I think we are getting very, very close to the point where private investors are going to look at it and say, “You know, on a net present value basis, we need to just repudiate that debt.” So far, they have sort of pushed them along step by step, and they are getting closer and closer to the line in the sand; in fact they are probably re-drawing the line in the sand as we speak, so it is very hard to say the point at which they are going to turn around and say “enough’s enough”, but we are getting close. There are clear signs.

Look at the CDS markets and everything they are pricing in. Not only that – there is so much distrust in the Eurozone. We have been saying for some time that the key figures for 2012 are TED (T-bill & EuroDollar) and LOIS (Limit Order Information System). As the TED spread shows, no-one wants to take the risk of lending dollars. And with LOIS, the Overnight Spread, nobody wants to be the one who is lending money to other banks, and that is precisely why there is so much money parked in the ECB every single night. This money is not circulating, which is incredibly bad for the global economy, but it is also a sign that we are getting closer and closer to a terminal event.

If you look at the TED spread and LOIS, they have gone from normal levels of around ten basis points, up to around 50 or 60 basis points. Over the last month or so, they have eased off, but we are closer and closer to capitulation. We are getting there, whether it is this week, this month, or six months from now, we are getting there. How far they can kick the can down the road we do not know, but the end is getting closer.