Hayman Advisor's Kyle Bass: The Pattern Is Set

As we've said many times, we hate us some dollar and we hate us some yen even more than the dollar. The euro is an enigma. Other fiat currencies are subject - long-term - to the same issues. That leaves us with gold. Apparently Hayman's Kyle Bass agrees with us. This should come as no surprise to long-time TILB readers as we've highlighted Kyle's work/talks several times.

Below is the text of Hayman's most recent letter to its clients following the European debacle this weekend. TILB's immediate reaction was "holy shit, I don't want to own the euro", in spite of most Wall Street participants claiming this was a great showing of support for the euro. Our view was this "show of support" was more akin to a roadmap for self destruction. The euro's rally than recent retrenchment seems to support our initial take.

We lifted the below text it from First Adaptor's blog (click here for First Adaptor). Make sure to follow First Adaptor on Twitter.

The Pattern is Set - Betting the Bank on a Keynesian Free Lunch by Kyle Bass

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Dear Investors:

With the avalanche of announcements over the weekend out of Europe and the IMF (and even the US Federal Reserve), I think it is important to communicate our views. The Lisbon Treaty explicitly prohibits direct monetization of fiscal deficits (i.e. printing money out of thin air in order to perpetuate deficit spending) because central bankers are (or I guess at least "were") aware it is the path to severe inflation or even hyperinflation. Just as the Romans did time and time again, the EU has now decided to change from the rule of law to the rule of man when it suits them. With none of the sixteen members of the currency union forecasted to be in compliance with the Maastricht Treaty (the foundation on which the EMU is built) in 2010, today's actions further attempt to eliminate the natural policing role that markets play with respect to egregious economic behavior. It looks like there will be no consequences for fiscal profligacy... no negative implications for continuing to spend far beyond one’s means... there will be nothing but moral hazard for running massive deficits as member countries can now hold hostage the entire EU (as Greece has done).

The ECB’s monetary policy action simply adds to the moral hazard that was originally created on the fiscal side of the problem. The pattern is now set. This is exactly how very smart people meeting together in order to "solve" a debt crisis frequently (and now permanently, it appears) mistake a solvency crisis for a liquidity crisis. From now on, it seems everything will be deemed to be a liquidity crisis that will be met with more "bail-outs" and debt financed spending. This will eventually break traction in a violent way and facilitate severe inflation or even hyperinflation. The one thing the EU taught us this weekend is that paper money will be worth less (maybe much less) in the future.

Germany weakened itself as it has now abandoned the core bargain of the Euro (which was that they would never be responsible for another country’s debt) by opting to be the largest guarantor of a new loan program that essentially makes European countries joint and severally liable for emergency funds for the worst fiscal offenders in the EU. It has begun a process of ceding its fiscal sovereignty to the over-indulgent countries. I still cannot believe Germany has done this. No wonder Merkel’s government is so unpopular. Meanwhile, I guess that Trichet must have decided on the lesser of two disastrous outcomes for fear that the very existence of their European Union was being called into question. He must have believed this to be the case as it would be the only rational reason to agree to such drastic measures – despite his blanket opposition to such policies just days ago and against the explicit wishes of the Bundesbank, Germany’s central bank.

We believe that there is a “Keynesian End” to the policy du jour that governments can solve all their fiscal and economic problems with more debt and more cross guarantees (aided and abetted by desperate central bankers). We at Hayman believe this theoretical endpoint is reached when debt service exceeds government revenues. Of course, any particular country has certain fixed expenses beyond debt service; therefore, the real endpoint occurs significantly in front of our definition. Outside of Greece and “Club Med” countries, Japan will begin to grace the front pages of newspapers very shortly. Japan has already reached a point where its central government tax revenues are eclipsed by debt service and social security payments alone. Coupled with its debt and demography problems, the world's second largest economy is about to enter a real bond crisis.

Attached is a Bank of International Settlements working paper that I highly suggest you read [TILB - link to referenced working paper here]. Please pay particular attention to the chart on the top of page 11 and remember the numbers you are seeing are as a percentage of GDP and NOT government revenue. This paper takes a very conservative view of interest rates (it essentially assumes they stay flat from the low levels of a few months ago – regardless of changes to debt levels or savings rates) and extrapolates current fiscal projections and even assumes pretty robust global growth. Even in this somewhat utopian scenario, the Keynesian End arrives in many of the world's countries much sooner than is popularly believed.

The competitive devaluation will begin in full force with Japan needing a weaker Yen to grow exports, the US needing a weaker dollar in order to double our exports (under the current Obama plan), and the EU really needing a weaker euro in order to grow their own exports. It is no wonder that Bretton Woods failed so miserably in prohibiting “cheating” via currency weakening. It is also no wonder that the IMF and World Bank were created at that very same meeting in 1944.

We have also attached a chart showing total IMF commitments to member countries as a percentage of each respective country’s IMF quota. The magnitude of the initial EUR 30 billion commitment to Greece trumps all other commitments made throughout this crisis by multiples. This does not even include the EUR 250 billion announced for the broader Eurozone this weekend. By granting Greece more than 30x their quota, they are making a mockery of their own rulebook.

This weekend, the EU and the IMF effectively went all-in with a bad hand in the highest stakes game of financial poker ever played with the world. We believe the agreement released was nothing more than a Potemkin agreement in order to placate bond investors. In the end (and there will be a reckoning for many countries) nations, including the United States, need to dramatically cut spending and get their fiscal balances in order. Unfortunately, our elected officials are on the hamster wheel of electoral cycles and are not able to make tough decisions like this as they would likely not be re-elected without a “sea change” in public opinion towards government spending and deficits. We are therefore on the path to significant currency devaluation around the world that will likely result in significant inflation. We increased our holdings of gold on Monday morning as well as taking other steps to position ourselves for the most likely outcome over the next few years. Interestingly enough, based upon the market reaction in the last 36 hours, it seems the law of diminishing returns applies to bailouts as well.

Sincerely,

J. Kyle Bass
Managing Partner

Kyle is clearly cut from the Austrian cloth.

Keynesianism Is So Nuanced

[This will be a multi-part series that discusses inflation, what money is and why it has value. We begin with some basics through the lens of Keynesianism's "attractiveness".]

I was on an email string recently about The Carnegie Endowment for International Peace's Uri Dadush. I made the statement that Dadush is simply a Keynesian, albeit one that is well connected and understands there are many difficult challenges that need to be addressed. In response to my email, a long-time friend of TILB and fellow liberty loving free marketer - though he is still finding his legs with regards to understanding the implications of his beliefs - responded to me that he has spoken at length with Dadush and that he's more nuanced and "complex" than being simply called a Keynsian. Here's a quote from Dadush's recent FT OpEd:

There are ways to mitigate the pain. For example, Germany and other countries could adopt more expansionary fiscal policies for a while. Or, more powerfully, the wider euro area could adopt more expansionary monetary policies for several years. Today, this second option is anathema as the “inflation fundamentalists” will have none of it.

Nuanced? I guess.

Here's what my friend said (mind you, he's an avowed libertarian - though he's still figuring himself out so to speak) - light editing for privacy reasons or clarification:

I met with the guy for 2 hours, and I would not classify him as such [a "strong Keynesian with fairly mainstream opinions"]. If anything, he is complex – and clearly what he says on CNBC and in NY Times oped is not what he can say behind closed doors. While Keynesian, he is not a classically academic Keynesian, sitting in a library dealing with only theory. He counsels governments facing massive social unrest and high unemployment, and he approaches his work with a much deeper appreciation for the human situation than we can. So while espousing money creation below, he was also very pragmatic with me about the moral hazard of this choice, the continued low interest rates, our over-reliance on debt, etc.

I am sympathetic with his situation. We often throw around our ideas without considering the reality of what will inevitably happen – at least in the short term – if our ideas were implemented. I know you will vehemently disagree with me on this, but the fact is that – again, in the short term – what you and I want ideally is economically wishful thinking and politically impossible. Yes, the opposite will bankrupt the world, and we are largely already insolvent. There’s no argument there. Should we suddenly balance our budget, shrink government dramatically, stop stimulus, war, and over-regulation, the result could be 50-60-70% unemployment rates – in the short run. I do believe the LT benefits of Austrian economics are obviously far superior to the Keynsian ponzi scheme.

However, no one talks about the transition, and what it would really mean for us. If you take a heroin addict, and suddenly “reform” him with complete withdrawal and going cold turkey, he will often die from this. His body cannot handle the shock.

Uri had just met with the Italian Finance Minister prior to seeing me – I can imagine that conversation. How do you convince someone like that that what he really needs is to leave the EU, get on the gold standard, balance his budget, cut taxes – and face assassination b/c 100 million are thrown into convulsions?

My point is that Uri deals with the reality of our current situation, while we do not. We read letters and books, then pontificate and rant without a good understanding of what it really means. It will kills us eventually, yes. But it will be a long, slow death probably instead of a quick one.

Lastly, I’ve read Ron Paul, Murry [sic] Rothbard, etc. They all talk about how wrong things are – and I agree with them. I have yet to see a transition plan, so if you know of anything they have written on how to get off the system we are currently addicted to, I’d love to read it.

I decided not to send him a reply by email. Instead, I decided to bring the discussion to TILB, as it's a more productive forum for this sort of thing. To be direct, I disagree with a number of his assertions.

In my opinion, what you described is in fact classic Keynesianism. No self respecting Keynesian would claim that running large deficits and printing money is a long-term viable solution or economically healthy approach. That is simply the tag line non-Keynsians use to belittle the Keynsian approach. It's the politicization the word "Keynesian" but not the reality. Dadush is a classic, behind-the-desk academic Keynesian. He provides advice based in theory as does every other economist, Austrian or otherwise.

The Keynesian argument is always more nuanced or "complex". The argument is generally that goverment needs to implement aggressive and targeted public spending policies during difficult economic periods because taking the hard medicine in the middle of a recession would (they believe) be too painful and counterproductive. By putting it into human terms it becomes very powerful (for obvious reasons) even if - in my opinion - the Keynsian trade is to attempt to avoid some human pain today in exchange for accepting much more human pain in the future.

What's here is tangible and it matters more to voters than tomorrow's pain.

So if we can just take a few easy money bong hits and confuse our body into thinking it's healthy, we can take the hard medicine then. We'll do what needs to be done, but just not yet. Tomorrow. Always some day in the future.

As you know, the issue is that the recession is not the problem, the recession is the cure. It's the cure to profligacy; a recession is simply a period of excess savings that offsets periods of excess spending and consumption.

Switching from a societal bias toward spending to one of savings is painful because society was confused by the profligacy into setting up a structure that serves society's apparent "needs" as if the profligate period is normal. The profligacy is full of false/unsustainable demand signals that trick people into creating/investing in the wrong kinds of businesses or in the wrong amount. The longer the cure is postponed by inflicting more easy money and socialist disease (e.g., Dadush's prescription), the more painful the necessary recession will be because the imbalances are greater and become more depended on.

It's not just imbalances as defined as switching from spending/borrowing to saving/investing. It's that entire industries were created to serve an unsustainable consumptive demand rather than productive advancement. It requires more than just saving new capital, but shifting existing capital from entire industries and possibly geographies to others. A human toll is left in the wreckage of these corrections. It is, however, unavoidable.

What is avoidable is compounding the problem through continued interference with the needed correction.

Bernanke/Bush/Obama's current postponement means the next recession (assuming we are - in fact - past "this one") will feel worse than this one. Their fight of postponement is really an attempt to induce even more capital to become malinvested toward less productive industries and to have us become even more dependant on unsustainable behaviors. So there will never be a period in which the hard medicine can be comfortably consumed because the hard medicine IS the recession and the imbalances it wants and needs to address continue to grow in the meantime. So avoiding taking the hard medicine means avoiding curing the disease; allowing it to metasticize, take root, grow and spread.

You know me well and you are correct: I do vehemently disagree with your statement. Short of a major North American landwar, there is virtually no scenario in which a society as productive as ours would experience anything like "50-60-70%" unemployment rates, even if one mistakenly changes the whole system in one yank.

Ron Paul and others have addressed transition plans. They logically begin with the easiest part: balancing the budget while cutting taxes. By taxing less and borrowing less, capital remains in private (productive) hands and out of public (unproductive) hands. Sounds hard, but if you are of the opinion that most of government is value-destructive, it's actually easy. First, bring the troops home and end the American military empire abroad (foreign military bases). Those two actions are somewhere in the $500 billion to $750 billion annually of savings (1/3 to half of our expected deficit this year and 100% of our deficit from three years ago). Other than for providing a platform for safe living and investment, military is a non-productive expense, by definition. Then end most of the "Department ofs", as I call them. Dept of Education, Dept of Interior, Dept of Energy, Dept of Homeland Security, etc. and slash the size of those you keep, emphasizing of course a strong defense (not offense - defense). This is key, bringing home the military does not mean having a weaker defense. It means changing the nature of it and allowing us to invest in true defense rather than wasting investment on overseas bases.

These cuts are - importantly - phased in but transparent and forecast so that the change is digestible.

That's the easy part. The harder part (though made much, much easier by having already shifted to a smaller government that runs a balanced budget) is moving to a harder currency. This involves ending the Fed and installing free banking, which means a banking system that doesn't "create" money with customer deposits. My personal view is the only way to do that is a slow, planned, well understood phase-in. It might take two decades to let happen so that the adjustment is manageable. I believe the huge benefits reaped from freeing capital from government hands would unleash such a lollapalooza of positives on society that shrinking the banking system would actually shift from an economic headwind to a tailwind by the latter years of the process.

As a final aside, in contrast to your assertion, I am not actually a government-installed-gold-standard man, because it relies on government to be well behaved. I am for market-based money, but that's a discussion for another day.

Germany Tells Greece To Go IMF Themselves

That headline wrote itself. This NY Times article took a somewhat more modest tack, although the body of the article made the point clearly. All emphasis added and commentary in brackets is from TILB.

As a quick aside, TILB views this as very positive for German Bunds:

March 18, 2010
Germany Backtracks on Europe Rescue for Greece
By MATTHEW SALTMARSH
The New York Times

The burden for resolving Greece’s financial crisis appeared to shift Thursday toward the International Monetary Fund as Germany distanced itself from supporting bilateral or European aid to the heavily indebted country.

Citing legal hurdles, a government official in Berlin said Thursday that Germany believed that any external financial support to Athens, if needed, would best be provided by the I.M.F.

“In the case that the Greeks get into really serious problems, we would support an I.M.F. solution,” said the official, who was not authorized to speak publicly on the matter.

Amid the uncertainty, the euro slipped against the dollar and was quoted at $1.3621 in New York afternoon trading, down from $1.3741 early in the session. European stocks also wilted. The Athens Stocks Exchange General Index ended 3.3 percent lower.

Germany is the euro area’s largest economy, so Berlin’s view on a bailout or other form of debt workout is pivotal.

European governments, including those of France and Germany, had previously signaled that any rescue of Greece, which has been punished by financial markets as a result of its surging deficit, would best be provided from within the euro area.

Berlin initially appeared reluctant to call on the I.M.F., preferring to resolve the matter within the currency bloc — even though some financial officials, like Jürgen Stark, a member of the executive board of the European Central Bank, had signaled their preference for an outside solution.

Since the euro’s inception in 1999, no member has sought support from the I.M.F., which nevertheless helped to bail out a number of East European economies at the height of the recent crisis.

An official from one of Germany’s euro-area partners said Greece might not be able to borrow enough money from the I.M.F. to fund its requirements, given that any loan would probably be limited to a multiple of the modest quota that Athens holds in the Washington-based institution.

Berlin’s about-face on aid to Greece has left some of its European partners scratching their heads about Germany’s intentions.

Daniel Gros, director of the Center for European Policy Studies in Brussels, said the change of heart had been prompted by two factors.

“The first is that this is for the domestic audience,” he said, referring to sentiment among many Germans that Greece should not be bailed out with their money.

“The second is that the strategy the Germans had in mind didn’t work,” Mr. Gros said. “The idea was that the mere political offer of support would be enough” to bolster investor confidence in Greek bonds.

...

The Greek government has been pushing for more clarity on what its European neighbors will do in the hope of bringing down its borrowing costs, which have risen as Greece’s debt troubles have become more acute. The yield on Greece’s benchmark 10-year bonds rose Thursday to 6.265 percent — a spread, or differential, of 3.14 percentage points over comparable German bonds, the European benchmark for safety.

While Berlin believes that Athens can live with the level of interest it is paying on its bonds — and that is not on the verge of a default — the Greek government thinks it should not have to pay so much to borrow, now that it has agreed to measures that are designed to cut its budget deficit to 8.7 percent of gross domestic product.

“The more the Greeks push for something concrete, the more they run into this brick wall,” Mr. Gros added.

Greece, meanwhile, has sought to leave its options open, while expressing frustration at the lack of a solid proposal from its E.U. partners.

Speaking to reporters after meeting E.U. lawmakers in Brussels, Prime Minister George A. Papandreou warned that the government would be hampered in its attempts to enact deficit cuts if the country is unable borrow money more cheaply. [TILB - hilarious. Greece basically threatens to sandbag their austerity "efforts" if they don't get a more equitable borrowing rate.]

An offer of E.U. aid “would be enough to tell the markets: hands off, no speculation, let this country do what it’s doing, let it in peace to be able to move ahead,” he said. [TILB: he must have accidentally left out the word "temporarily".]

If Athens relies on financing from the markets at high interest rates, “that undermines the actual measures that you are taking,” Mr. Papandreou said. “That money then goes to the interest of those who are loaning to you rather than the implementation of a program.” [TILB: ah, such is the nature of borrowing beyond your means.]

...

Speaking in Washington, Caroline Atkinson, the I.M.F.’s director of external relations, said Thursday that the fund had not yet been approached by Athens.

“We expect the euro-zone countries to want to and to plan to resolve this question by themselves,” she said. She added that the I.M.F. was ready to respond to a request from Greece for a loan.

...

On Monday, Jean-Claude Juncker of Luxembourg, who chairs the meetings of euro zone finance ministers, said that a European framework would be created to coordinate bilateral loans, if required, involving all 16 euro-zone members. He added, however, that the final decisions on any package would be made by E.U. heads of government.

As a reason for Germany’s apparent change of position, the German official pointed to Article 125 of the European Union’s governing treaty, which states that the European Union or individual members should not be liable for or assume the commitments of governments.

...

Still, the drip feeding of announcements from Berlin has left some politicians in Europe cold.

“I find what has happened, or rather what has not happened over the past few days and weeks, incomprehensible,” said Guy Verhofstadt, the former Belgian prime minister and the current president of the Liberal Democratic bloc in the European Parliament. “It is incomprehensible because it is precisely a European response that is the quickest and least costly solution.” [TILB: Least costly to whom, exactly? Certainly not to Germany.]

Officials in the German Finance Ministry also appeared to be unaware of their government’s shift in stance. Financial officials in other euro-zone countries were similarly baffled.

“The signals that one gets out of Germany have varied considerably,” said an official from another euro-area country, who was not permitted to speak publicly. “I fail to see what their line is.”

The official said the assumption among euro-area finance ministries is that Greece might require about €25 billion, or $34 billion, to cover near-term liabilities. Athens needs to borrow €53 billion in financial markets this year and must refinance around €20 billion of debt in April and May — at interest rates likely to be high.

The official added that Greece would probably be able to borrow between $12 billion and $14 billion from the I.M.F., assuming the same model used in recent rescues. For example, in 2009 the fund loaned Romania €13 billion, which was about 1,100 percent of that country’s quota at the fund. Greece holds just 0.38 percent of the fund’s quota, which is expressed as 823 million of the fund’s own unit of currency — Special Drawing Rights — each worth $1.53. [TILB: $14 billion ain't gonna be enough, long-term]

The official said other multilateral lenders like the World Bank or the European Investment Bank would not be in a position to lend Greece €10 billion or more. That would mean that the European Union — and Germany — might have to support Greece in any event, perhaps alongside the I.M.F.

He also said that legal impediments to E.U. support did not appear to be insurmountable, although some euro members might need to change national rules.

“We know how we could do it,” he said.

Still, Mrs. Merkel’s change of line will be welcomed by some. Mr. Stark of the E.C.B. told a German newspaper this month that joint financing “could become very expensive, would create false incentives and burden countries with solid finances.” During an interview last month, Otmar Issing, a former top official of the German and European central banks, warned that the Union could not “impose the kind of sanctions that would be needed, and it would make Brussels too unpopular.” “A better way,” he said, “is for Greece to approach the I.M.F. It is the only institution that can impose strict enough conditions.”

Matthew Saltmarsh reported from Paris and Stephen Castle from Brussels.

[HT: LB]

The Final Countdown: Greek Sovereign Default

The aptly named band Europe brought us the epic music video and song "The Final Countdown" about 20 years too early (I mean, who cares about the countdown to the end of communism - let's talk about the PIIGS sovereign default).

As I read all these articles about Greece's impending doom, it's hard not to hear in the back of my head the implied complaint, "why won't they just lend us the money for free? This doesn't make any sense. Just lend us the money for free!"

[emphasis added and comments in brackets]

Europe Weighs Possibility of Debt Default in Greece
New York Times
By STEPHEN CASTLE and MATTHEW SALTMARSH

European leaders are quietly considering whether to come to the aid of their troubled neighbor Greece amid fears that the nation might default on its debts and unleash another round of financial crisis.

Only a month after Dubai was rescued by its neighboring emirate Abu Dhabi, Germany, France and other European powers are discussing whether Greece might need a bailout too.

After a decade of debt-fueled profligacy, Greece is confronting what amounts to a run on the bank. And, despite repeated assurances from Athens, the nation’s strained finances have put already jittery financial markets on edge. On Thursday, the worries stretched all the way to Wall Street, where the stock market sank 1.1 percent.

Some economists worry that Greece’s troubles could have deep and lasting repercussions for Europe. The crisis poses complex challenges for the euro, which Greece adopted in 2001. The currency sank to a six-month low against the dollar and yen on Thursday.[ironically, TILB thinks letting Greece go could be an incredibly strong event for the euro]

“Greece failing is not an option, and lots of people think that we will have to intervene at some stage,” said one European finance official, who was not permitted to speak publicly on the matter. “It doesn’t have to happen, and we hope it won’t, but it would be better than seeing a default.”

...

But doubts have intensified over the credibility of the drastic austerity measures put forward to try to get Greece’s budget under control, in spite of concerted efforts by the Greek government to calm the markets.

Investors worry that the crisis in Greece could touch off a domino effect across Southern Europe. Many are fleeing bond markets in Portugal, Spain and Italy out of concern the troubles might spread. [TILB - Collectively known as the PIIGS when Ireland is included]

The market’s judgment has been swift and brutal. On Thursday, the difference between the interest rates on Greek and German bonds — a measure of the risk investors perceive in the Greek debt — rose to nearly four full percentage points, its highest level since the euro was adopted.

Officials in Athens, Frankfurt and Brussels remained adamant that Greece was not at risk of being forced to abandon the euro. [TILB - of course not. Could you imagine if they said, "hey, we're thinking of going back to the Drachma so that we can print our way out of this debacle?" That would be amazing.]

As a condition of any aid package, the Greek government led by Mr. Papandreou would be asked to provide a more detailed program to bring the country’s deficit — currently equal to 12.7 percent of gross domestic product — under control. European Union rules call for a maximum of 3 percent. Officials insist that any bailout must not put into doubt the credibility of the euro.

Another condition of any aid would be further guarantees over the reliability of Greece’s economic data. Last year the newly elected government in Athens announced a sharp upward revision of its deficit figures, which have since been exposed as seriously flawed.

Next week, the European Commission is expected to propose greater powers for the European statistical agency, Eurostat, to audit the accounts of national governments. [TILB - watch Czech president Vaclav Klaus give this interview where he presciently assesses the fact that the EU and the Euro are forfeitures of sovereignity and freedom, then watch the slow leech of powers from the states to the centralized United States of Europe]

The latest moves reflect a continuing skepticism among euro-zone members over the practicality of the plans put forward so far by the Greek government. Athens wants to reduce the deficit to 3 percent of G.D.P. by 2012, an objective described as unrealistic by one European diplomat, also speaking on condition of anonymity. These plans are also to be assessed by the commission next week.

Greece’s budget deficit is four times the E.U. limit, while the country’s debt amounts to 113 percent of G.D.P. But officials insist that, because Greece is not one of the euro zone’s larger economies, the problems created by its grim public finances can be absorbed. The Greek economy represents about 2.5 percent of the euro area’s G.D.P. [TILB - Japan is over 200% sovereign debt to GDP and the US is a bit over 80%. Carmen Reinhardt and Kenneth Rogoff show that 90% is the threshold past which few survive, as well as 60% externally financed debt to GDP - this latter point has been Japan's saving grace, though that is likely over]

...

For Greece’s neighbors, there is the possibility of a domino effect, with investors subsequently moving on to test the resilience of another heavily indebted member of the euro area — possibly Italy, whose debt is also 113 percent of its gross domestic product.

...

One option, deemed unlikely, would be issuing a sovereign bond for the entire 16-nation euro area. That would probably require complex legal changes among members. [TILB - see prior Vaclav Klaus reference]

...

On Monday, Greece paid a hefty 6.22 percent rate to borrow money in the bond market, underscoring investors’ concern. [TILB - and it's much more expensive for them already, just five days later. If memory serves us well, they have a number of huge maturities in April/May that will be challenging to finance affordably without German backstop...]

In an interview this week, the Greek finance minister, George Papaconstantinou, acknowledged that the high rates were punitive but asked that investors keep faith. Greece needs to raise at least 53 billion euros this year, much of it this spring.

People think this is news?

As we've been saying for a year, just wait until Japan blows. It's situation is nearly twice as bad as Greece's. Despite having 40% of the U.S.'s GDP, it has as much debt. If its blended cost of funding goes up from 1.5% to a bit over 3%, 100% of its tax revenue will be absorbed by interest expense. We're talking about the second largest economy in the world and it literally has no other options than massively debasing its currency or defualting on its debt (or, more likely, both). That's what they get for following Bernanke's wicked advice.

The sooner Japan blows, the better for the U.S. - I suspect our only hope of not suffering the same fate is to witness Japan's meltdown after having followed a similar prescription.

And as to Europe, just wait until Greece's implosion lights up Italy, which is a very large economy. That is the real worry the EU is facing: do we let Italy go?

Which brings us full circle, to The Final Countdown...