Wednesday, May 16, 2012

Mark Grant On Europe's Plan B, Greek Bank Runs, and Why We Need New Sunglasses

by Tyler Durden on 05/16/2012
Via Mark J. Grant, Author of Out of the Box,

“I'm not upset that you lied to me, I'm upset that from now on I can't believe you.” - Friedrich Nietzsche

The words were spoken by many; Juncker, the German Finance Minister, Merkel, Barroso, Monti and you can just keep going. They all said the same thing about the Greek PSI, “This is the best and final offer.” Each intonation was made with great moral suasion; each speech was directed toward the world’s institutional investors as we were reminded again and again that there was no “Plan B.” In the end most money managers swallowed the bitter pill, given such forceful pronouncements and took the deal offered on the $261 billion swap only to watch the value of the new bonds sink into horizon but no choice was given so there was nothing else, really, that could have been done.

“Trust ... plays a key role in economic exchange and politics. In the absence of trust among trading partners, market transactions break down. In the absence of trust in a country's institutions and leaders, political legitimacy breaks down. Much recent evidence indicates that trust contributes to economic, political and social success.” - The scientific journal, Nature

Of all of the events of yesterday, of all of the news, the most significant in my view was the announcement that Greece had paid off the $554 million bond maturity that was due yesterday and paid it off in full; 100 cents on the Dollar. With approximately $6 billion left in international bonds outstanding governed under some law besides Greek law two things are now obvious; there was a Plan B and it was just implemented and that Brussels and Berlin supported the Greek pay-off as there was not one peep of objection from any capital in Europe. What we were told, consequently, was not the truth and no financial paradigm can last for long when they lie to investors and breach the trust that had been placed in them.

"If you take a broad enough definition of trust, then it would explain basically all the difference between the per capita income of the United States and Somalia. That suggests that trust is worth $12.4 trillion dollars a year to the U.S., which, in case you are wondering, is 99.5% of this country's income.” - Steve Knack, Senior Economist at the World Bank

With the yield on the Italian ten year hovering around 6.00% now and the yield on the Spanish 10 year fluctuating around 6.50% the markets are clearly reacting to the breach of faith that has been demonstrated by Europe. This morning the Prime Minister of Spain said that “Spain faces the serious risk of being shut out of the markets.” This comment, by the way, may be the precursor to Spain turning to the EU/ECB/IMF for help and then between the total breakdown in governance in Greece and a plea for financial assistance from Spain is a spot, a line in the sand, where not only Angels but any rational man should well have great fear to tred.

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