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The Proposed Euro Bond Issue to Bailout ECB

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Frankfurt 2017

COMMENT: Well Mr. Armstrong, perhaps you are wrong at last. It looks like your meetings in Brussels that quite a few people noted you shuffling around town did have an impact. Looks like your constant warning about the structure of the euro’s failure is being corrected. Looks like you did make a difference. So congratulations on being wrong I suppose.


ANSWER: Perhaps. But it has taken 20 years to make this point. Granted, the recent proposal to create a debt for the Eurozone is a compromise, but it is still not a consolidation of the national debts of Europe. This new compromise proposal from the EU Commission shows that they are listening at last but not for the reason I have been warning about. However, I would not say I am wrong. What I have always said is only when the collapse becomes eminent do we see the political change. My point is no change comes without the pain and typically only with the crash and burn. People who want to pretend they are advisors to government are usually bullshit artists. Government will NEVER listen to anyone if you try to get them to act without pain. Now this maneuver is not what it appears. It’s a bailout for the ECB.

The EU Commission intends to issue securities that “bundle” the entire Eurozone debt. So in other words, these will be the CDO instruments for Europe. Instead of bundling mortgages and assuming that the collective process will somehow be worth more than the individual parts, that is the compromise here. The securities are to be launched on the market as a “European Safe Asset” in order to attract the euro government bonds to investors. This is not quite what I had proposed from the outset. My proposal was they should have consolidated all the debt at the beginning, thereafter each member state would issue its own state debt as in the USA. But they were trying to sell the idea that a single currency would produce a single interest rate for all. That is what I warned them would NEVER HAPPEN.

This compromise proposal is ​​consolidating government bonds into asset backed securities (ABS). This is intended to pack the national government bonds into securities in order to ensure the financing of the states even after the end of the ECB’s buying-up program. Draghi has created a huge problem buying 40% of the government bonds. Who will buy when the ECB stops?

This is the crash and burn. The EU officials hope and pray that this scheme will increase the demand for governments’ debts of the weaker economies within the Eurozone. They also hope that this will secure the reserves of the European banks where right now a good stiff wind will blow them over. This, they hope and pray, will better diversify bank risks by diversifying their portfolios and ignoring political problems emerging in the south.

This is still a half-hearted measure to move toward federalization of Europe without consolidating the debts, which they fear will still be rejected by the North v the South. Wolfgang Schäuble had said that he no longer opposes a transfer union in principle and this ABS market has dropped sharply post-2007 because it was a subprime crisis. So here the same idea behind the mortgage crisis is being applied to the European debt. What is dangerous here is that the opposite of the original idea behind a single currency will unfold. Originally, they pitched that a single currency would create a single interest rate look at the United States. I warned that was only federally and you had to pick up the rug to see that the 50 states were subject to their own credit rating. Under this scheme, the idea of creating an ABS instead of consolidating the debt runs the risk that countries like Germany will find themselves (1) no longer the target for a capital flight among Eurozone states, and (2) that the overall interest rate will rise because of the lower quality being included. Therefore, you will not achieve the lowest rate for all as initially proposed back in the ’90s, but rates will rise to reflect the risks in Southern Europe.

While this EU initiative is designed to prepare for the time when the ECB stops its Quantitative Easing that has trapped the ECB and Draghi is pleading for help Behind the Curtain. They are hoping and praying that this is the solution to defuse the ECB risk of its absurd policies. Like the worst trader who buys and never defines where he is wrong, Draghi has made that same mistake. There is a major risk that the ECB itself can collapse.

The EU officials are still shaking in their boots with regard to Italy and the Movementso Cinque Stelli (Five Star Movement). If Italy pulls out of the Euro, the ECB can collapse. The EU feels comfortable about Merkel winning the Bundestag election in Germany. They are still concerned about Italy, Greece, and a split in Spain. One goes, and then all will go.

This compromise proposal to create an ABS  is being put forth because of the German resistance to Eurobonds. The crisis is coming to a head, for when the ECB quantitative easing ends, the interest rates will be substantially higher and the budgets of member states will explode beyond set limits. They are beginning to see that the ECB will soon face difficulties, because as rates rise, the value of their bond holdings will drop like a stone. I have warned that the ECB is the one central bank that can collapse thanks to Draghi.

The EU Commission is also working on a proposal to establish a joint budget for the Eurozone, which is the endgame of federalization. The aim was to cement the monetary union in place and thereby prevent any more BREXIT nonsense from their view. This has risen to the top of considerations with the French presidential election and the victory of Macron. But France is in trouble. There is no money to fund what Macron promised. This becomes another patch to try to keep a failed system together.

This is why I am holding the July 22nd, 2017 seminar just on the Eurozone at the end of July. The details and tickets will go up for sale this week. This will be reasonable for it is only a half-day event. The price of a seat will be $350.