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The ESM will be the vortex which swallows Europe (if ratified)

Today it emerged that the ESM (European Stability Mechanism) could later be paying for the €100 billion bailout of Spain’s banking system. This ‘stability’ mechanism, however, has only been ratified by France, Holland and Slovenia – and may never materialise.

The video below is targeted at a German audience, but is still relevant to any European.

That ESM which everybody may think is a cuddly solution to the problem, is in fact a huge Orwellian nightmare. Nobody will be able to sue it or any of its officials, whilst they will have carte blanche to act above the law. Unelected overlord Eurosprouts will be able to impose their will over Europe and have the right to ask for any money from governments, whenever they like, within 7 days. Given such stringent conditions, it is difficult to see why any sovereign nation would want to participate and ratify the proposals. Please correct me if I am wrong (and I suspect I am) but it seems only 3 countries have ratified it so far, and I think it is likely that the pledges for the ESM will never really come to light.

Moreover, any bailout in Europe is also subject to the risks of contagious circular logic. The Eurozone’s members have to stump up the cash to pay into the ESM. But if anyone needs a proper bailout,  Italy stumps up 17.9%, Spain 11.9%, and France 20.4%, of the ESM’s funding. But I have some questions.

A) How is Spain going to be able to afford to fund a bailout to itself, when it inevitably needs one?
B) By paying up for Spain, surely Italy will be pushed over the edge and will need a bailout. How will Spain be able to afford to fund that, given that it has just been bailed out?
C) Then doesn’t this put ‘safer countries’ like France and Germany at risk? If this jiggery-pokery continues with the ESM, they may very well need a bailout themselves – although I don’t see the Euro lasting that long.

To conclude, sovereign bailouts are throwing money down the drain. The ESM is only going strengthen contagion fears because it spreads out the risk amongst already fragile public finances. Therefore if the ESM does get signed into national statute books, it will make Europe far from stable and will be the sinkhole that swallows it up.

 
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Posted by on June 11, 2012 in Trading Ideas

 

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How democracy will triumph over the EU – and take down the Euro with it

"Madame Merkel, 'ave your fiskalpact et la France will 'ave zees baguettes!"

As I write, voters in France are casting their ballot papers in the first round of the presidential elections. Francois Hollande’s Partie Socialiste and Sarkozy’s right-wing UMP party are expected to proceed to the second round, where many predict that Hollande will win. What this means is that Sarkozy, who has been a bastion of saving the Euro with a big bazooka, or a firewall, (or perhaps his stool) – will be out of office. Instead, Hollande will be in power and he wants to renegotiate the Fiskalpact that Merkel and the EU have imposed on the Eurozone.

Hollande wants the agreement to have more focus on growth and jobs, as opposed to cutting budget deficits and national debt. This could raise hackles in Germany and Brussels, as George Magnus of UBS notes (quoted from Zerohedge)

If Hollande, as leader of the Eurozone’s second economy, were to try and stand up to the German government, he would not only feel he had a popular mandate to do so, but doubtless act as a lightning rod for a wave of sympathy and Euro-angst from other Eurozone countries, such as Italy, which are becoming increasingly worried about the character and consequences of the current German-dominated approach to the Eurosystem crisis.

This “German-dominated approach” which Magnus talks about, involves bailing out the “fiscally-irresponsible” countries and then impose swinging austerity on them – at whatever cost. But since this is not easy to do in a democratic country – the EU has implanted their ‘technocrats’ to enforce the fiskalpact.

In Athens riots are almost a daily occurrence, unemployment is over 50% among young people, and at 22% among the overall population, according to official (and probably untrustworthy) figures – I suspect it is much higher. The Bank of Greece scandalously embezzled funds from universities and hospitals to pay off the Eurocrats. In Italy, Burlesconi was ousted to make way for Monti and the EU elites are putting pressure on Spain. The EU is forcing these countries to destroy their economies with austerity – with non-elected rulers.

The contempt held towards its citizens by the EU has led to the rise of popularist, nationalist parties. If we look towards Greece, the main parties are struggling to hold power in the upcoming elections, whilst fringe parties are garnering votes. Rajoy in Spain is trying to insist that his country will not need a bailout because he does not want to suggest Greek-style austerity. Even in Germany, where Merkel is not up for re-election until next October, her political support is slipping because many Germans do not want to throw good money after bad to the European periphery.

The question is: how much longer can this continue? The EU was established to prevent another war in Europe, but its actions seem to do little but provoke one.

The Eurozone’s underlying problem is its currency. In the past if a country was struggling it would devalue its currency, exports would become cheaper, imports would become dearer and the domestic economy would naturally recover. However, the Euro puts a straight jacket on these economically challenged countries because  fixed currency rates prevent them from devaluation. If the likes of Italy and Greece want their economies to recover, then they will need free-floating exchange rates, not austerity.

National politicians will realise this in due course, once the pressure from their people becomes too great. Once one country sets a precedent about leaving the Euro, or attacking the EU, then others will quickly follow. Hollande may be the start of it – maybe he won’t be. Greek elections in the next fortnight may be the catalyst, where the likely result is an eclectic mix of parties opposing austerity, maybe they won’t be. But however you look at the Eurozone crisis, democracy has to triumph over the EU, and consequently rip the Euro to shreds.

To trade on this, I would get out of stocks (and short-sell them) right now, and buy German Bunds and gold. The equity markets have recently undergone a rally – totally ignoring the fact that the West is in a dire economic state – reality will reassert itself soon enough. Shorting the FTSE 100, I would put a stop loss at 6000, I think there is a good risk/reward ratio there, and I do not expect it to reach that state.

German Bunds are not a perfect hedge, as a Euro collapse would lead to the Germans accepting a large part of the ECB’s losses. However, if you are a Eurozone bank, the safest place to park your money is in German bonds as their budget is fairly balanced, and if the Euro broke up your bonds would become denominated in New Deutsche Marks – which would appreciate greatly against other currencies. So I would recommend buying these for their safe haven status.

As for gold, if the world does go into an Armageddon type scenario due to Europe, gold will be one of the few safe places for your money. It has been trading in a fairly cheap range by recent standards and I expect it to climb much further. I would put a stop at $1600 an ounce if I were trading today.

I currently hold all three positions, and got into them at an earlier stage. Since then, all three positions have been profitable.

 
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Posted by on April 22, 2012 in Trading Ideas

 

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