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.
