Tuesday, December 6, 2011


Such was the picture all across the world of Nikki and Angie holding up their hands to each other with outstreached fingers.  "What does that mean," said the wags?  Who the hell cares say I.  That moment it time was about as meaningful or important as The Suit's first go-around with the German Finance Minister today.  Got to hand it to him, however.  Here's this guy, the head money guy in an administration that in three years has raised the national debt by four trillion dollars and who, in contravention of law, has managed not to present a budget for the running of the government of the United States for over two years.  And he's over there telling the Euros how to get out of THEIR mess?  That friends is what is called south of the Rio Grande, baludos which means...oh never mind.

Anyway, despite who's talking to who, My Really Smart Friend, Larry, says the game is over for Euroland and his thinking, as usual, is quite sound and based on experiences that we have both shared.    To encapsulate the same, Larry's point is that it is all about Italy at this point.  Forget Greece, both of us agree Greece is gone and perhaps Portugal as well but neither count and frankly, as I have often said, should never have counted.  Italy is the key but not from the standpoint as it is being viewed at this point in time but from a somewhat longer standpoint, perhaps in a span of 12 to 18 months.

The immediate gameplan is to keep Italy current in the sense of the servicing of its debt.  Europe could not stand an Italian default in the sense of what is being discussed regarding Greece or for that matter Portugal.   Remember, it it still about the banks and the associated politics and they are still not ready.  And so, the game plan is to keep Italy alive--to buy time so to speak--for as long as possible until...well, that's where the trouble starts.

Both of us made our bones in the debt crisis of the 1980s.  Both of us made our careers in international finance and sovereign risk finance and it is therefor understandable that we make comparisons with that period when looking at Europe today.  I would think that both of us are looking at what has occured over the last few days at the possible changes in the governance of the Italian state and asking ourselves is this going to be enough?  In Larry's case the answer is no; in mine, I'm not sure but it I must admit the prospects aren't brilliant.

The problem in regard to Italy is exactly the same as we found in Mexico and Latin America in the late eighties and if we think about it for a minute what we are about to face in the United States.  We can service debt:  the government can always raise taxes but that is not a solution.  The only real solution is growth and the question then becomes is the level of debt in the case of Italy so great that it will, under any future scenario, sap so many resources in its servicing to prohibit the level of growth needed without a massive restructuring of governance and a net reduction in the stock of debt outstanding.  In the case of Mexico and Latin America it was not until the stock of debt was reduced (by approximately 35%) thru the use of Brady Bonds that conditions were set for the renewal of growth which has culminated in the vast improved economies all across the region.  Italy appears to be today as Latin America was so many years ago in the remedy appears to be the same: a large reduction in the stock of debt through a restruction and forgiveness before growth can resume.  And it is here where two old friends diverge; I think it could happen within the context of a restructured Euro zone, Larry does not as he believes any attempt would have to take place in the context of the strict fiscal straightjacket as proposed by Frau Merkel and M. Sarkorzy and that will simply take too long.  In that he is correct but tune in tomorrow and I'll tell you why I'm more optomistic...not much mind you but hey, someone has to be.


  1. Oh Mr. James,
    Do you really still believe in the Euro? I thought grownups gave up believing such things. No Virginia, there is no euro.

    We have to stop pretending that there is a euro. Greece has about euro 8 bln in maturities between 12/19 and year-end, do you think they pay par out to the hedge funds? If not, we are in an event of default.

    S&P puts Portugal on watch for a 2 notch downgrade - junk city. Anyone paid attention to Spain lately?

    S&Ps actions today are the death knell. If Germany and France support the south then they lose the Aaa, and if they lose the Aaa then the EFSF loses the Aaa and doesn't work. But if they don't then the Greeks walk, which makes the Irish and Portugese and Italians and Spanish more likely to leave. This is a coordination game and the first to leave brings down the house of cards.

    Do you think the bureaucrats can possibly agree to give up sovereignty over a weekend? They couldn't agree on what to have for dinner. And does it matter one whit? How does this effect the immediate situation?

    Europe faces a classic Irving Fisher / Hyman Minsky debt deleveeaging cycle without a central bank that is allowed to re-flate.

    There is zero liquidity in Europe. The US and UK have foamed the runway.

    it's over, folks just haven't admitted it yet.

  2. Nice line just crossed ZeroHedge:

    "Basically, S&P just told Europe it has two days to get the continent in order or else. Said otherwise, it just called Europe's bluff. The problem is Europe is holding 2-7 offsuit..."