The Beginning of the End of Europe


Gonzalo Lira

Yesterday, the European contagion spread to Italy and Spain. The sovereign debt of those two countries swooned—for no discernible reason.

No discernible reason whatsoever: The Italian and Spanish bond markets just sort of . . . plopped, like when a learning-to-walk toddler suddenly plops on his behind? Exactly like that: For no reason whatsoever.

The only conclusion that I can draw from this Monday swoon is that we’ve hit the tipping point: This is the start of the eurozone endgame. It is now only a matter of time before the eurozone breaks apart. Therefore, get back in your seats, buckle up, and brace yourselves good—‘cause it’s gonna be a bumpy ride.

Let me explain my thinking:

For those of you who somehow have missed out on this movie: Europe has been in trouble because the nations of the periphery—Portugal, Ireland, Italy, Greece and Spain, the so-called PIIGS—have massive sovereign debts which they simply cannot pay. 

Regardless of how the debt of the PIIGS got to be the size that it is, none of them can survive without cash: Cash to maintain their government services, and cash to pay off their debts.

In the case of all the PIIGS, they need more debt in order to raise the cash they need to pay off the old debt. They are simply not generating enough revenue to survive.

What do you call it, when a borrower has to take out more loans to pay off the maturing debts? A Ponzi scheme. ‘Nuff said.

Greece was on deck for more loans to pay off the old loans. The International Monetary Fund (IMF), the European Council (EC) and the European Central Bank (ECB) had put together a bailout package, coupled with Greek promises of austerity and higher taxes, as well as a complicated contraption to roll over some of the maturing Greek debt.

In the Grand Scheme which is the European Union, Greece is a bit player: It’s GDP is roughly a couple of percentage points of the whole eurozone—nothing to get into a twist over.

But the IMF, the EC and the ECB were getting into a twist over Greece—like an octopuss playing Twister, as a matter of fact—because of what Greece represented:

A firewall.

Greece needs a couple of hundred billion euros—but Italy has the third largest sovereign debt in the world, topped only by Japan’s and the United States’. Over $2 trillion of its debt comes due over the next five years. And Spain is not that far behind, if you add the regional debts of the autonomous regions, and the fact that the enormous Spanish banking sector is teetering, and will very likely need to be bailed by the Spanish government.

In short, Italy and Spain are simply Too Big To Bail-out.

Hence the troika—the IMF, the EC and the ECB—was trying its mightiest to bail out Greece and use it as a firewall to stop the sovereign debt crisis from spreading across the eurozone.

Too late: As of yesterday, Monday July 11, the tipping point was reached, insofar as market fears of Italy and Spain.

Monday was when Spanish 10-year bonds suddenly crossed the 6% yield mark, reaching highs not seen since 1997; the spread between Spanish and German debt is the widest in eurozone history. Meanwhile, Italy’s 10-year also hit records—5.67% yields—also records since donkey’s ears.

What happened Monday wasn’t a panic, precisely: It was more of a pre-panic. Think of it like a sharp tremor before The Big One: A taste of what a true sovereign debt panic would be like.

Now, why is this happening? That is, why is this happeningnow—what triggered it?

Nobody knows—and that’s precisely the problem. It could have been the ECB’s decision last week to raise interest rates 25 basis points to 1.5%—even as there is no inflationary smoke anywhere on the eurozone horizon. It could have been the IMF’s Christine Lagarde trying to sound tough over the weekend, saying essentially that all options were on the table with regards to Greece, including default. It could have been that some random bond salesman woke up gloomy because his football team lost on Sunday night, and spread his foul mood to his whole trading desk, and from thence to the entire eurobond market.

There are tons of explanations. But really, nobody knows why the eurobond markets swooned yesterday.

Ultimately, what triggered this swoon is a pointless question—like asking which of the last five straws broke the camel’s back. As it is, if it hadn’t been overloaded, this particular camel—or rather, this particular PIIG—would have been able to easily stand up to any one of those straws.

But on Monday, a tipping point was reached—the camel’s back was broken—the glass began to overflow: Pick your metaphor—the result is all the same:

The bond markets all now believe that Italy and Spain are in serious trouble—which is of course a self-fulfilling prophecy.

A lot of economists—Paul Krugman and his fluffer Brad DeLong are a case in point—swerve between dismissal of the so-called “Bond Vigilantes”, and berating them. But these none-too-clever fellows miss the point: The bond markets matter for the single, inescapable fact that they provide the money for the party.

The sovereign governments go out and offer their bonds to the market. And the markets go and buy their issuance—so long as the bond markets trust them.

But if the bond markets lose that trust—if they no longer believe that the money they lend is gonna get repaid—then they don’t buy the sovereign bonds. If they don’t buy ‘em, then the governments won’t have the cash to pay for the services they provide as well as pay for the maturing debt.

If the governments don’t have the cash to pay for their obligations, then they default—then they’re broke.

It really is that simple.

Monday was the unequivocal signal that the eurobond markets no longer trust Italy and Spain.

This Thursday, Italy is going to auction off 15-year and 25-year bonds. The chief economist of Citigroup and former Bank of England policy maven Willem Buiter thinks the ECB will simplyhave to step in and buy some of those bonds in order to prevent a failed auction—which could easily devolve into a full-scale panic at this point in time.

In other words, Buiter think that the ECB will have to begin to monetize the PIIGS’s sovereign debt, in order to avert a full-scale panic in the eurozone. This is major: Builter is plugged in, and he doesn’t hit the alarm button lightly.

This afternoon, however, Italy successfully auctioned off short-term paper, albeit it at yields of 3.67%, as opposed to the pre-swoon forecast of 3.1%.

So maybe Buiter is wrong: Maybe nothing happens on Thursday.

But actually, it doesn’t really matter—not after Monday’s swoon. It doesn’t matter if Thursday’s Italian bond auction goes smooth as glass or not: Monday was the signal that the markets have realized—in their bones—that the PIIGS are all broke, and that they will default, eventually.

The lack of a trigger for Monday’s swoon (or a “trigger” so trivial that it really is as slim as a single stick of straw) proves that the sovereign bond markets have no faith not just in Greece and Portugal and Ireland, but in Spain and Italy—the whales among the PIIGS.

For my Members at the Strategic Planning Group, I’ve already mapped out a detailed plan of what to do, once there is a sovereign default and the eurozone begins to break apart.

But the moment of when the eurozone would start to break apart? That was—I thought—in the indeterminate future: “Close, but not yet,” was my thinking.

Not anymore. Not after yesterday.

When a bond market swoons for no real reason at all, it’s a sign that the market participants realize they’re playing a game of musical chairs.

Therefore, the beginning of the end of the eurozone has arrived. It will happen imminently. And it could be triggered byanything—or like on Monday, by nothing at all.

Prepare accordingly.

5 Responses

  1. D C says:

    Really nice journal, man hats off to you my friend. Keep uncovering the dirt they try to feel our minds with it, and keep on always telling the truth, as nothing else will set the mind free.

  2. Abaddon says:

    This is a system created by the money men, and everybody is money orientated, dependant upon it, addicted to it, nobody can buy or sell without it, it is our past, our present, and our future as we prepare our pensions for our old age. The money men have got the system sown up. You can complain, say you was robbed, call the bankers all the ba..stards, fraudsters, crooks, but they are still in charge, have all the money and control of a WORLD, and all you do is cry out about this or that, and how the bankster gangsters manipulated another money making racket to their advantage. There is NOTHING any of you can do about it, as they wreck a world before our eyes, we are witnesses of our own impotence and their power. Wake up people, they are taking us ALL to hell, themselves included, for greed has no limits, a global addiction for world dominance is leading to global extinction of a corrupt financial, political, and hypocritical religious world.

    What a fitting and appropriate end for the millenial greed of man for power.

  3. JD says:

    I lived in Germany for a while. I had the opportunity to go to an interview and seminar at a financial company to work as a salesman (or something). All I had to do was to sell this ‘idea’ to more people and get them to work for me. It was a pyramid scheme, which at the time were banned in Germany. Capitalist countries are nothing more than collapsing pyramid schemes. The next man up the pyramid scrapes the crap off of his boot on the layer below. It’s dog eat dog and it stinks. The only way to combat this whole system is to globally boycott products which aren’t absolutely necessary and become selfsufficient insofar as basic survival is required. Food, shelter and basic health needs. The rest…entertainment, alcohol, cigarattes…all the crap they tell us it ‘OK’ to do is completely irrelevant. We all need to break the chain of idiotic behaviour which keeps us spiritually, financially and mentally in chains. I wish people would wake the hell up. We are nothing but slaves.

  4. Is it so difficult to understand that by the dawn of the USD all and every IMF club currency does the same????? Whats wrong with the overall intelligence of talkers and talkers and neverending talkers? Not to react since latest 2005 is a crime no buddy wish to understand, that tremendeous mafia style and organised, covered up by Bush, Blair, Aznar and hundrets of other dump leaders that a brave brain cant handle to understand. Fake bonds and funds have bee the salvation of the casino game since the early 80s already but let me tell everybody that this is just possible because we are idiots on one side and addicted to the same game on the other side. Stop everybody talking political or even religious b.s. because the worldenemy, and this since many but many time is living in the background behind a fake insitutionalised wall called monetarian emissory control. Dont let you allow that wars kill our kids, brothers and sisters only because and again we are to stupid and far to much cowards to fight the ultimate god of evil: the paymaster.

  5. Ahsan says:


    Dajjal’s arrival is near.

    Allah Hafiz!

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