European Bonds Setup for More Losses as EFSF Creates More Problems Than it Solves

October 14, 2011


The EFSF does not solve the underlying problem and should be viewed as yet another government induced sugar high for the chronically ill diabetic patient. EFSF is akin to TARP, only bad mortgages in the private sector are not behind the decline in value of bank assets. Sovereign debt and government finances are the problem. TARP would not have “worked” at delaying the onset of a bond market disaster if the US Government were viewed as being insolvent. 

Deutsche Bank CEO :

“The injection of capital would not address the actual problem,” Ackermann said, according to the copy of a speech given at a conference in Berlin today. “It is not the capital funding of banks that is the problem, but rather the fact that government bonds have lost their status as risk-free assets.”

Thus, it’s difficult to make a positive case for bonds of any European country, since none have moved to take care of the crux of their problem. Governments made too many promises to their citizens that they can not possibly honor. We know that reducing government jobs and transfer payments is the long term path towards a successful fiscal consolidation, according to this 37 year study. Not one country has done this yet, nor is anywhere close to doing so.

Politicians have shown they would prefer to extend and pretend by raising credit limits. They will continue to do so until the bond market cuts them off. This process continues to get interrupted by programs like the EFSF.  This is best exemplified by Greece and their faux austerity programs.

Now, the core is contaminated. Countries with their own fiscal problems, such as Germany, France, the United States, are assuming Greece’s risk, throwing good money after bad. The trend remains in tact for all the developed countries to head towards either default in the traditional sense or default via inflation. Bond prices eventually fall regardless.

We know that bailouts of non government entities is a risk factor in violence against governments, as shown by Occupy Wall Street, so this will create more long term problems in Europe than it solves. This is will be particularly true when politicians force the ECB to monetize the debt and levy an inflation tax on their citizens.

The ECB’s Road to Money Printing
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