Steen Jakobsen, chief economist for Saxo bank in Denmark, pinged me with an interesting set of comments this morning. Please consider the tale of the frog and the indebted princess.
This morning I had the pleasure of being on CNBC together with a pundit from a major investment bank. He claimed that if Greece went bankrupt then no one would lend them any money and it would leave them without trading partners. I countered that this would happen anyway if we continue to ignore the losses that creditors need to take on their Greek investments. Only through a Schumpeter-like “Destruction of Capital”, after all, can we give Greece a fighting chance to survive.
Why is everyone so afraid of a default? Are we supposed to believe we have banished them forever?
History is full of nations going bankrupt – and in no circumstances has it ever meant a complete loss of trading, credit, etc. Quite the contrary – it’s precisely the default and accompanying devaluation that often sows the seeds of a recovery.
Here, according to a Wikipedia article on sovereign defaults, are a few examples of major European sovereigns that have defaulted over the years:
- Spain – 15 times! (1557, 1575, 1596, 1607, 1627, 1647, 1809, 1820, 1831, 1834, 1851, 1867, 1872, 1882, 1936-1939) Isn’t it interesting that it defaulted most often when it was getting “something for nothing” in the form of New World gold riches?
- England – a modest 3 times (1340, 1472, 1596)
- France – 9 times. (1558, 1624, 1648, 1661, 1701, 1715, 1770, 1788, 1812)
- AND now for the much loved BRIC countries:
- Brazil – 10 times inside the last 115 years (1898, 1902, 1914, 1931, 1937, 1961, 1964, 1983, 1986-1987, 1990)
- Russia (1839, 1885, 1918, 1947, 1957, 1991, 1998)
- India (1958, 1969, 1972)
- China (1921, 1932, 1939)
The complete list in the above link includes a list of 39 African sovereign defaults, 26 Asian sovereign defaults, a whopping 91 European sovereign defaults, and for the Americas, a stunning 154 sovereign defaults.
Wow! Could it be that some of the “competitiveness” the BRICs and other countries have today is based on episodes of cleaning the slate and declaring a new beginning? Why must we hang on forever to old debt and past mistakes?
Down with the pro-zombie Keynesians and up with the lessons from history!
Also…please, please let this talk about whether or not the ECB is doing QE stop right now. The ECB’s balance sheet is up 38% since July 1st of last year. The same period saw the Fed’s balance increase by one per cent! Talk about printing money.
It seems that the Princess Merko-zy did indeed kiss the frog and it morphed into a hopelessly indebted Club Med Prince. And then they lived happily ever after? My compatriot Hans Christian Andersen would have been proud of today’s politicians and their penchant for perpetuating fantasy.
The only problem? Domestic banks in the PIIGS countries are fast concentrating their exposure to their own sovereign’s debt, and this is increasing the leverage in the system and the risk of systemic contagion. The LTRO is merely a massive dose of morphine applied to reduce he pain from the mortal wound that the EU has inflicted on its finances over the years. It has succeeded in reducing the pain, but the problem remains that ever increasing doses will be needed to hide the pain until that wound kills the patient if the EU refuses to go in and perform emergency surgery.
Please also note two other interesting pieces from my colleagues today:
Equity Strategist Peter Garnry correctly points out EBA’s deadline will not be met on bank capital requirement rules: Extension on EBA’s capital could support rally in stocks and Peter Bo Kiaer piece on how Apple may disappoint: Apple Earnings: Another miss in the making.
Finally, the stress indicators have now more or less “mean-reverted” back to 200 day moving-average from here we need more than just hope to keep the game going. Note how ECB deposit and the REPO value continues down, while the banking stress has diminished – for a while.
I am off to the one country in Europe which makes sense: Switzerland.
Given Switzerland’s currency peg, I do not think the Swiss Central Bank makes that much sense either. Perhaps in relative terms.
Berlin Ready to See Stronger ‘Firewall’
Interestingly, Steen wrote the above before this news came out: Berlin Ready to See Stronger ‘Firewall’
Berlin appeared to soften its longstanding resistance to increasing the funds only hours after the International Monetary Fund warned that the eurozone needed more money to build “a larger firewall” to prevent the crisis from spreading to its core economies.
In return the German chancellor wants eurozone heads of government to sign up to rules to cut budget deficits and public debt that are much tougher than those currently foreseen by eurozone governments.
For Ms Merkel, increasing the fund risks a showdown with a restive parliament that is sceptical of further exposing German taxpayers to the rescue effort. But she is now said to be willing to take that risk if she can put her stamp on the budget rules in the fiscal compact.
“We think we can get the ESM approved if we link it to solid new budget rules,” a German official said. One European official in turn said Germany was “framing the debate” about budget rules with a possible trade-off on the size of the bailout fund.
Steen Nailed Two Key Points
- The ECB has Launched QE disguised as an LTRO
- Chancellor Merkel Kissed the Debt Frog
Mike “Mish” Shedlock
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