September could prove to be a very interesting month to say the least. September 29th in particular could be extraordinary. Will Merkel throw away her political future in order to kick the can and help the PIIGS stay afloat a little longer temporarily avoiding the inevitable or will Parliament vote to refrain from boosting the EFSF’s (European Financial Stability Facility) bailout capabilities marking the beginning of the end; the breakup of the European Union?
The ECB, which is headed by a Frenchman (that fools no one as the Germans have the most influence over anything that the ECB does), has already signaled that its role in purchasing government debt is merely a temporary one and that the EFSF will take over eventually. The Germans are getting fed up with having to bail everyone out, as they should. This Wednesday they will vote on the legality of the previous Greek bailouts. To make matters worse, the Italians just decided to not cut spending and reign in their deficit as much as was previously agreed upon in order for them to receive “aid”. This recent development will anger the German people even more, making it more difficult for their politicians to vote in favor of bailing the PIIGS out. In a recent mock vote Parliament was 5 votes away from cutting off support for the EFSF’s bond buying efforts. If those 5 votes were to sway the other way, Spanish and Italian bond yields would likely soar.
This brings us to the next issue, the Italians. Italy needs to roll a substantial portion of its debt this month (September). If Germany won’t back the ECB or EFSF, yields will spike for the Italians (not to mention the Spanish). Who wants to hold Italian debt at 6% when there is no way they can pay it back without Germany’s backing? I wouldn’t hold it for a 20% yield without Germany supporting it; it’s worthless without German support. If the Germans won’t back Italian debt, I’d bet that demand dries up and the Italians are left up the creek without a paddle. As I wrote in a previous article, we are already seeing strong resistance from countries like Finland and Slovakia in regard to additional bailouts for the PIIGS.
The whole democratic EFSF voting process is going to make European debt situation worse and drag this out. Only one country has to vote against it and speak out to put an end to any progress up to that point. Not to mention that the entire concept around which the EFSF is based is flawed. Printing money or bailing out these countries does not solve their problems. Their issues stem from the fact that their debt is growing faster than their GDP. Most cannot even collect taxes from their people effectively, have aging populations, and no real positive change in worker productivity.
Unfortunately, the glass is half empty in regards to Europe and the global economy. Our way out of this global growth and debt crisis is a choice between pain and a lot of pain. The Germans may continue to support the PIIGS here a little while longer, but eventually they will cut the cord. The Greeks and Italians are already demonstrating that they cannot effectively cut spending and generate revenues. The Germans won’t work for free to subsidize their spending needs, it’s not like they are getting some action on the side (analogy to rich guy subsidizing a gold diggers spending in exchange for sex in case you missed that). The EU will break up one way or another. I can’t say if Germany would up and leave or some of the PIIGS will get the boot, but the way the current system is set up is unsustainable and does not make sense. Maybe another week, maybe another year. The question is no longer if Europe will collapse as we know it, but rather when it will collapse. Stay away from equities during September. Again, stocks have a much greater chance of going down than up in the coming months.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
