The Financial World's Expectations Are Threatening The European Union

car crash

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While the European Union plays pat-a-cake with the world’s financial future, and the markets continue trading on rumours of rainbows, smiles, and hugs, an incredibly frightening and potentially generationally-and-globally devastating economic crash and disaster looms on the horizon. I know I’ve written more-than-my-fair on this topic, but let’s look at the impeding Greek default in the form of a simple analogy: imagine a driver’s fallen asleep at the wheel, and in the backseat are 2 passengers, who, instead of seizing the wheel and changing direction, are instead arguing with each other about whom should do what and who, should a crash (inevitably) occur, will take the blame.

Ergo, while I realise I’ve sounded like a broken record the past few months, the frustrating fact remains that both policymakers and the markets believe that each other are going to magically solve the Euro-crisis. 

Most interestingly, at least from where I philosophically sit, has been the absolute divergence in expectations (and, frankly, analysis) on the situation. What do I mean by this?

Let’s take a look at two key opinions put out the past few days, regarding recent news trickling out of Europe that the E.U. is looking to write down as much s 50% of Greece’s debt (in a move that threatens, at least at its core, the very survival of Deutsche Bank).

Bloomberg outlines expectations post-debt solution in EU Said to Consider 50% Greek Writedown:

The Greek bond losses may be accompanied by a pledge to rule out debt restructurings in other countries that received bailouts, such as Portugal, to persuade investors that Europe has mastered the crisis, said the people, who declined to be identified because the negotiations will run for another week.

In turn, let’s look at John Mauldin’s latest on Ireland:

Others truly believe they will be offered a haircut when Greece and Portugal get theirs. They fully expect it.

In a meeting with an establishment-insider economist (off the record), who was at the table when the first deal was done, he said there was an implicit understanding with the IMF (and ECB) that whatever was offered to Greece, et al. would be available to Ireland.

That’s right – look at these opinions/expectations.  Could they be any more diametrically opposed?  Now, as many of my faithful readers have pointed out, I’m less-than-intelligent and wrong on nearly-every-issue-of-the-day, but this gaping (and growing) chasm between these two opinions terrifies me. 

Specifically, these opinions reveal a few underlying issues driving the EuroCrisis:

1) The European Union needs to get its act together and come together with an actual, sustainable plan to deal NOT just with Greece, but with the impending defaults coming down the economic pike (i.e. Portugal and Spain, anyone?).  Economic sunshine and rainbows (aka Euro-unity) aren’t going to solve the problem, and the longer this goes on, the worse the impending crash and corresponding global economic turmoil.

2) The markets need to take an educated look at the “news” coming out of Europe and really read between the financial lines.  To whit: a few weeks, Angela Merkel came out and basically stated, “Look, it’s possible countries will default on debt.”  Instead of reading the financial writing on the wall, the markets shrugged and waited for the next blip-and-flip of good news (i.e. “Hey, we’re going to try and figure something out at some distant date in the future  – all’s good!”). Once again, guys, please understand there’s no happy ending to this economic story.

3) Ireland poses a dangerous and impending threat to the European Union (regardless of the markets’ belief that once the “Greece problem” is addressed, all will be right in the economic world).  What makes the financial world think that, given all the care, concern, and attention paid to Greece, when the Euro-economic dust settles, that Ireland – that country once dubbed the Celtic Tiger  – will say, “Well, them’s the breaks.” No. Instead, easy money rides on the possibility that, within the next few years, Ireland’s going to stage an economic coup and demand new, more favourable terms from the E.U.  In short, get ready for a constant stream of assaults headed toward the E.U.’s economic and political assaults about to assail the E.U. 

So there we have it.  While the economic and political worlds debate, dither, and decide on what news from Europe portends the future, the E.U. is slowly, yet deliberately headed down the path of financial destruction. Even worse?  No one on either – or any – side of the issue seems to understand the dimensions or scope of the the threat.  I just hope we all get our intellectual acts together in time to check the impeding disaster.

Margaret Bogenrief is a partner with ACM Partners, a boutique crisis management and distressed investing firm serving companies and municipalities in financial distress.  She can be reached at [email protected]

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