"Revolutions can be neither made nor stopped. The only thing that can be done is for one of several of its children to give it a direction by a dint of victories." -Napoleon
The Bond Vigilantes and the other Gods of the Marketplace may have been temporarily mollified by the weekend's emergency EU accord, in spite of the fact that none of the agreements can be certain with a constitutional challenge to the entire notion of sovereign bailouts looming in the Bundesverfassungsgerict (the German Supreme Court). Angela Merkel's party was obliterated in local elections in the Rhine-Westphalia region because of the governing coalition's support of the bailouts--so the bailout itself is far from a certainty, and it is all based on the nebulous concept of "loan guarantees" whereby one bankrupt state whose credit rating hasn't been junked (e.g. Germany) promises to back the debts of another bankrupt state whose credit rating has been junked (e.g. Greece). So what the markets are cheering here is the idea that things are going to be ok, and certainly not any reality of that.
But that doesn't get us past the real issue. The markets seem happy today, but the Greeks are still rioting. If the bailout does in fact happen, they are going to riot even more, what with the myriad of unreasonable conditions accompanying the bailout--telling government employees they can't get paid for 14 months of work in each 12 month calendar year, advising people that they have to work until they are at least 55, or, god forbid, 65. Europe is in a veritable double-bind. If the bailouts don't happen, the markets will decimate the Euro, and turn the PIIGS into Argentina circa 2001. If the bailouts do happen, the Greeks will burn Athens to the ground. Whatever happens, I don't expect the Greeks will be contributing any actual work to their own recovery.
Greece's sovereign debt is $405 Billion, about 125% of GDP. That is about $35,000 per man, woman, and child in the small mediterranean republic. The rescue package for Greece totals out to about $140 billion, which is about what was ultimately spent on the bailout of AIG after Lehman Brothers collapsed. Spain's public debt is approximately $650 Billion. Portugal is another $200 Billion. Italy, the behemoth, is more than $2 Trillion. The sort of financial austerity necessary to get these numbers under control will inflame the latin passions of the Spanish, Portugese, and Italian people, and Rome, Madrid, and Lisbon will soon look like Athens does today.
There is no bailout that fixes this fundamental problem. The welfare state is like a drug addiction, and there are a lot of junkies about to be forced to quit cold turkey. What may please the bond vigilantes today will turn the masses into mobs tomorrow. There is simply too much debt and not enough equity (real, tangible, underlying assets) in the world. All of this will pale in comparison to the effect of a downgrade of US or UK sovereign debt--that chapter is yet to come.
In the meantime, I wonder what will happen when the next German general election rolls around and these unpopular bailouts are put to the ballot box test. Or, perhaps more titillating is the thought of an enterprising Tea Party candidate putting 2 and 2 together and realizing that when the IMF is putting up half of this mammoth rescue package, most of that money is coming directly or indirectly from the American taxpayer.
As I pointed out more than a year ago--if you borrow from Peter to pay Paul for long enough, eventually Peter will be broke.
For now, I wouldn't be planning any vacations to Europe. The worst is yet to come.
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