The Maginot Line Illusion

By Peter Boone and Simon Johnson

Many commentators suggest Spain is now the euro zone’s Maginot line.  The argument is clear:  Spain, with GDP over $1.3 trillion (8th largest in the world; 5th largest in Europe) and its large outstanding bank and public debt, is simply too big to fail without causing irreparable harm to the euro zone financial system.  If we dig in here, the reasoning goes, eurozone market upheavals can be stopped.

Just as Germany did in 1940, in past weeks global market forces circumvented this new Maginot line without serious resistance.  The events that shook equity markets were not just in Spain; they were everywhere in the world.  The cost of protecting against default on India’s largest private bank rose 79BP, or 44%, and the cost of protecting against major Korean banks’ default similarly rose 45%.  Oil prices collapsed and emerging markets found their access to credit markets dried up.  The interest rate for lending between banks in US dollars (LIBOR) shot up, and investors piled funds into their currently perceived “safe-havens” driving down the yields of German, French, and US bonds.

This pattern reflects the core problem facing world markets today.  Investors have already begun to extrapolate from eurozone problems to understand that the world remains a highly dangerous place.  The latent dangers include our overreliance on rapid Asian growth that might falter, the pressure for sharp fiscal tightening in nations with high deficits (other than in the world’s “safe havens”), and highly leveraged banks that continue to own toxic real estate, weak sovereign debt, and other assets.  If world financial markets once again decide their risk appetite is again low, there are many unsustainable leveraged institutions and governments that are in for a tough ride.

Spain’s role in this possible calamity is more that of a sideshow than a frontline.  Spain has a fighting chance for survival without serious economic disruption, but only if the world economy remains at the least benign.  To get out of its difficulties, the Spanish government needs to be far more determined than the light approach taken by the Irish and Portuguese (which face far worse problems than Spain).

To be clear, Spain has a better chance of avoiding sovereign and massive bank defaults compared to Greece, which is in intensive care – with a doubtful prognosis and a permanent resource infusion from the European Central Bank.  In this regard the announcements in the last few weeks from Spain were helpful, for example when the government chose resolution authority over religious authority in taking legal control of a troubled savings bank (CajaSur) from the Catholic Church

Spain’s savings banks, often owned by local authorities, the church, and other civic groups are generally a bastion of moral hazard due to the implicit belief that no political leader would let the relevant creditors fail.  The CajaSur takeover did not impose losses on creditors, but it did establish that the managers of failed banks can at least lose their jobs.

The highly unpopular budget reforms announced by Prime Minister Zapatero further demonstrate some resolve – and the fact they just passed a legislative hurdle is encouraging.  According to optimistic forecasts, Spain’s budget deficit will fall to 5.3% of GDP next year (although the European Commission still has this projected at 9.8%).  If Spain can get anywhere near this level, despite 20% unemployment, then financial markets will probably go easy on them.  Spain’s high unemployment is partly the result of a more liberalized labor market that made it easier for employers not renew term contracts.  This has made Spain one of the worst nations in Europe in terms of employment loss, but it also means jobs could rebound quickly.

So the question is not whether Spain can remain solvent, but rather whether world markets will be patient enough – and risk tolerant enough – for a much wider range of nations to have enough time to make the needed adjustments.  

The Achilles heel for Spain, and for others in Europe, are private credit markets – loose banking regulations and (in some countries) lax fiscal policy during the boom of the 2000s have placed serious countries at the mercy of bond markets.  We now know the European Central Bank will refinance sovereign debt for a long time, but there are 22 trillion euros of credits provided by the euro zone banking system largely to the private sector (with total eurozone GDP around 9 trillion euros, this makes euroland highly dependent on credit).  If the banking system decides it needs to tighten up on risk-taking, some of this credit will be cut off – thus further slowing growth in the region. 

The first and greatest cuts under such a scenario would be for debtors in Portugal-Ireland-Italy-Greece-and-Spain (still lumped together by markets).  There are 2 trillion euros of external private credits to Spain, Greece, and Portugal alone – any modest attempt to contract this amount will set off a new round of lower asset prices as enterprises and households try to sell off what they can in order to repay loans, while banks march in to foreclose on property and cut their exposures. 

In the United States such a credit contraction would be met with the Federal Reserve pouring out liquidity and helping bail out many creditors.  This would not solve the underlying problem – and stores up serious moral hazard issues for creditors in the future – but it at least gives time for the debtors to make payments.  The US will also remain a safe haven, as least for a while, and that gives a cushion for the government to run budget deficits and avoid fiscal cuts driven by nervous bond markets. 

For Europe it is much harder to predict how events will evolve over the same time frame.  The recently announced 750bn euro package actually implies that the troubled nations (definitely Greece and Ireland, likely Portugal and perhaps Spain) must make large fiscal cuts.  Bond market vigilantes reign supreme if their actions force fiscal cuts – sadly, this is where the eurozone periphery finds itself.  At the moment Germany and France are the safe havens.  Bond yields in France fell sharply the last two weeks, while Spain’s yields rose, and would have increased much more were it not for ECB purchases.

But who is really safe in Europe?  With France running an 8% GDP budget deficit (for 2010) and a debt/GDP ratio of 83.6%, should we be confident they are safe while Spain is not (with debt/GDP at 65%)?  France’s thirty years of budget deficits do not bode well for anyone expecting an immediate strong fiscal response.  In many ways Spain appears better placed to take tough actions than France.

If investors decide that risk taking is no longer the right mode, many nations will be in trouble; there may be Maginot Lines but they are worth nothing.  If recent market sentiment signals a coming global downturn rather than continued world growth, investors will soon question whether even the safest havens are safe.

An edited version of this article appeared today on the’s Economix; it is used here with permission.  If you would like to reproduce the entire post, please contact the New York Times.

44 thoughts on “The Maginot Line Illusion

  1. I disagree with some of your prescribed answers on Europe, but this is one of your better posts. I’m actually more in line with Hugh Hendry and Jim Rogers style thinking on this. It’s not that I don’t care about those people, or not somewhat sympathetic to their situation. But I don’t think dragging things out and giving more Euros (or cash infusions) to corrupt banks helps the situation. It equates to using a second credit card to pay off a maxed out first credit card. “Money down a rat hole” is the best way to describe Bernanke and the European Central Bank (ECB) handing money to comprehensively corrupt European banks

    Germany is the one country that has shown even a modicum of responsibility here. I have much much much more sympathy for Spain here than Greece because they have shown more fiscal responsibility than Greece. So if Germany wanted to lend a hand to Spain I think it makes more logic than lending a hand to Greece.

    In the end I think Europe is going down and going down hard, and if you look at the fact mutual funds such as VGTSX went up 1.8% yesterday it just proves one thing. Human beings are not always logical and EMH is a load of bullcrap

  2. I liked 13 Bankers as much as the next guy-probably more- so I’m wondering why the above post references gov’t debt/GDP levels that do not include the liabilities of the entire financial sector that would inevitably be “bailed out.”
    Getting rid of bad bank managers is a good step, but if the gov’t-and not the bank creditors-always takes the haircut on the “resolution,” then bank debt needs to be added to gov’t debt to see the magnitude of the problem, no?

  3. Another illuminating history lesson (Maginot line), although, France is probably next in line for some fiscal “tough love”.

    The more savvy investor knows to disversify their portfolios (under in any market condition).

  4. The French banks have some large Greece debtors. Why do you think France was pointing at Germany like they were evil Shylock??? Because the French have big hearts?? Page 184 of “13 Bankers”,
    “If you owe the bank $100 that’s your problem. If you owe the bank $100 million, that’s the bank’s problem.”—J. Paul Getty

    The French would watch Greece skewer themselves, but they don’t want to be the next entree.

  5. The European Stability Mechanism was recently set up
    towards ‘countries in trouble’, so bail-out no2
    is more compréhensive.
    The problem is that in spite of the amount of money
    poured by European states into rescuing their financial
    institutions, there is no resolution authority yet
    though it seems to be in the works ( which in Europe
    , despite the emergency, is scheduled for the fall ) and that it is not part of the ECB’s responsibilities to regulate the European banking system, I agree with Ted to his description of the self-described ‘un-orthodox’ lending politics to the banks, a system which demonstrated its absurdity again these days with about 1/3 of the money repo-ed to the European banks going in deposit bank in the ECB’s coffers for a meager 0.25% whereas lending is unexistent, +0.1% yoy, to the private sector, while declining to non-financial companies. So reforms are urgently needed,as the BIS ans the ECB in its just published Financial Stability Report both stated that in preparation for the forthcoming Basel III standards ( horizon 2012 ) may lead to further (..) credit contraction

  6. “According to optimistic forecasts, Spain’s budget deficit will fall to 5.3% of GDP next year (although the European Commission still has this projected at 9.8%). If Spain can get anywhere near this level, despite 20% unemployment, then financial markets will probably go easy on them.”

    Euro devaluation will help somewhat, but not where it really needs to help – bilateral trade with EU surplus nations. German linkage is killing Spanish jobs.

    “Spain’s high unemployment is partly the result of a more liberalized labor market that made it easier for employers not renew term contracts. This has made Spain one of the worst nations in Europe in terms of employment loss, but it also means jobs could rebound quickly.”

    Do you believe this? The part about lost jobs rebounding quickly? I suppose the question is what quickly means. I know this is the IMF mantra, but I would think this depends on broader global macroeconomic conditions. Yes, we can always go back to the Chile example – IMF defenders _always_ go back to the Chile example. But Chile’s adjustment was painful, may not have occurred without a ruthless dictator, and even after the adjustment the economy hasn’t had great unemployment rates (although they look good compared to current US rates).

  7. Simon: I’m unclear on the message here. Are you saying ‘Let Spain go — it doesn’t matter’, or are you saying ‘This thing is much bigger than just Spain. We need a broader approach which recognizes the totality of the problem’. If the latter, what might that solution be?

  8. There are four problems in Europe. Only the latest three are specifically European:

    1) The publicly financed, privately managed money creating system, through debt, is not up to democratic and civilizational standards.

    2) Insufficient federalization of the European economic, fiscal and statistical systems.

    3) Unsustainable economic models of the PIIGS.

    4) Unbalances between France, Germany, and the rest. Especially Germany (which over-exports).

    The last three problems are coming to the attention of the Europeans, and will be solved. The Lisbon Treaty has been thrown overboard, and further federalization is already implemented. Spain’s budget is partly the result of marching orders from France and Germany.

    The problem of the inequity of the public-private money creation remains, though, and can only be solved by advancing socialism in Europe. This, of everybody learning Mandarin. China and India have banks the old fashion way, investing in the real economy, not shadow banking and derivatives.

    By the way, the Maginot line did work. It caused gigantic losses to elite fascist forces which attacked it directly. Thousands killed, and they did not go through, although the French troops used were few. Simply the Belgian segment had not been completed, because of American interference. Moreover, the French mobile force of seven armored divisions was thrown north into the Netherlands to save them, while the three indestructible French extremely heavy divisions, with by far the world’s largest tanks, were cut off from their fuel supplies, by the crazy hyper concentrated thrust conceived by Hitler, Guderian, and Rommel (the later committing, in his enthusiasm, mass murders of French troops who had stopped him for three days, until they ran out of ammunition).

    Thanks for American help, by the way (it was formally asked, and refused, because American businessmen were busy doing business with Adolf Hitler).

  9. Maginot Line? “If we dig in here, the reasoning goes, eurozone market upheavals can be stopped.”?

    Are those European or US commentators? Whoever they are they don’t seem to understand the reference if they think it sounds good to say “This is my Maginot Line.” It means you’re a fossilized group-thinker who’s about to get completely routed.

    That’s like the ignoramuses who don’t understand how to use a Cassandra reference.

  10. The Maginot line was NOT the cause of France’s defeat in May-June 1940, far from it. Nor was the mentality that it caused. Actually, it was the opposite. Following its successful offensive in Norway, the French army was too aggressive in May 1940, and allowed itself to be cut from behind (after defeating Nazi armor in Belgium).

    In truth, everything that could have gone wrong, went wrong. For several crucial months, God joined the plutocrats of the USA on the side of Nazism.

    Coming to the help of neutral hypocrites (Belgium, Netherlands), and the refusal of the USA to send an ultimatum to Hitler, were causes.

    Another cause was that a pilot saw the Nazi armor piled up on just one leafy road in the Ardennes forest, but he was not believed, so absurd it sounded. Still cause another was that the Duke of Windsor betrayed, and told Hitler where the weak point of the French defense plans. Still another is that the French had anticipated the Nazi attack in February 1940, and were ready to counteract it. But, unbeknownst to them, a plane carrying the plans crashed in Belgium, so the Nazis switched to a completely crazy plan, that nobody could have anticipated (so great was its probability of failure).

    Verdict? When confronted to evil, it is best to eradicate evil (as France decided to do in 1938 with Nazism). Playing tennis with evil does not help. Here, the evil at hand is the public-private fractional reserve system. The same which helped Hitler so much. It has to be eliminated: it is the source of the financial system overwhelming power.

  11. The point of the Maginot line was to force the Germans to go one particular way. It wasn’t because of the Line that the French lost – it was because they failed to recognise the German strategy and shift their mobile reserve to counterattack effectively.

    You may wish to recast your answers in the light of the revised metaphor.

  12. Europe’s Woes Bound To Worsen

    June 2, 2010 – Huff Post – excerpts

    “Getting rid of Europe’s sovereign debt crisis — like squashing the pesky mosquito buzzing around us at the barbecue — is easier said than done. That raises the perplexing $64,000 question: After a horrendous May — which saw the major averages tumble, largely attributable to the Eurozone’s debt woes — when will this crisis stop bombing the U.S. stock market?

    The sad answer: not anytime soon, a number of market pros say. In fact, some look for Greece’s financial crisis to soon be followed by similar events in such countries as Spain, Portugal and Italy, which several believe could lead to a collapse of the faltering Euro, perhaps even a breakup of the European Union, and, in any event, continue to inflict damage on the U.S. stock market.

    “Investment adviser Harry Dent, Jr. of the HS Dent Forecast newsletter in Tampa, Fla. argues that the $1 trillion bailout program was done clearly to protect the British, French and German banks, which, respectively hold PIGGS’debt of $393 billion, $911 billion and $704 billion, or a total of $2.018 trillion

    Like the U.S. bailouts, he notes, it simply pushes the debt crisis down the road a bit. But in this case, he says, austerity measures are required, which will only worsen an already failing economy. Hence, he concludes, it is very likely that this crisis will return in months, not years.

    Meanwhile, there is another frightening prospect to worry about — the mounting belief that the financial woes of the PIIGS may well spread to the U.S., the U.K. and Japan.

    If that indeed occurs, all hell will break lose.”

  13. Yes, Patrice is right….

    Lining up French forces all along the nation’s border as you wait for the bad guys to strike was a stroke of genius. Only the French, with their deep ability for analytical thinking, could have come up with a plan so bold.

  14. I know all that. The details of how the Maginot mentality wasn’t my subject.

    My subject was the fact that the Maginot mentality, broadly considered, is what led to France’s multiple fatal delusions. (I’ll add one you forgot – if the Western allies would’ve simply attacked in 1939, even moderately, the Germans would’ve quickly collapsed, according to Keitel and/or Jodl at Nuremburg. I forget which. Same for 1938. But the Maginot mentality dictated waiting for the Germans to attack.)

    I agree completely that the time to smash evil is when you identify it. I’ve said as much about the corporate rackets many times.

  15. You can’t easily “revise” a famous, or in this case infamous, metaphor. The Maginot line looks eternally to stand for stagnant thinking and complete psychological collapse when everything doesn’t go exactly as planned.

    Anybody who wants to revise that has his work cut out for him.

    Why not “our Marne”? That’s not only a positive image but sounds rather precise for what they’re claiming they can do with this situation.

    Of course, “Maginot” is actually correct to describe this insane attempt to prop up this absurd Tower of Babel (there’s my preferred metaphor for all this). But it’s correct in a way opposite from the incorrect way Simon says they’re using it.

  16. “Like the U.S. bailouts, he notes, it simply pushes the debt crisis down the road a bit. But in this case, he says, austerity measures are required, which will only worsen an already failing economy. Hence, he concludes, it is very likely that this crisis will return in months, not years.”
    Definitely agree. Debt must either be repudiated (and asset values brought down), or we are in for a very long spell of deficient AD.

  17. You should always be careful who you get your info from, and how they might benefit from certain story lines.

  18. Nouriel Roubini: Banks Are Still Too Big To Fail — And Too Big To Manage (Video)

    06- 3-10 05:22 PM – Huff Post – excerpts

    “The world’s largest financial institutions are not only too big too fail, says Nouriel Roubini, an economics professor at NYU’s Stern School Of Business — they are too big to save and too big to manage.

    At a book signing in May for Roubini’s most recent book, “Crisis Economics: A Crash Course In the Future of Finance”, Roubini discussed our nation’s financial behemoths and the importance of dismantling them. While the debate in Congress over how to reform the regulation and supervision of financial institutions is going in the right direction, Roubini said, it isn’t enough.

    “I would do something slightly more radical.”

    Because of their size, financial institutions are also too big to be saved.

    “That’s what is happening right now in Europe,” he said.

  19. “If investors decide that risk taking is no longer the right mode, many nations will be in trouble; there may be Maginot Lines but they are worth nothing. If recent market sentiment signals a coming global downturn rather than continued world growth, investors will soon question whether even the safest havens are safe.”

    Can’t resist the suggestion that the U. S. may be strapped for cash, because it is also at the mercy of the bond market, eh? ;)

  20. With the $1 Trillion the ECB is just buying time and only a few months. But I don’t think the public of the debt laden will stand for very austere budgets when the private economy is not providing jobs. I think the bond market should back off or govs shoudl rightfully face public pressure to renegotiate or repudiate the debts. I hope the public calls the bluff of the debt market, let them take a loss. Its the only way the market will properly learn the meaning of the word default, if it actually happens, it’d make for a much more stable economic environment, one which more properly evaluates risk.

  21. Illusion’s “Not” – perhaps stealthy persuasion circumventing the age old addage of having too, “run its course”? Sure…the Euro currency ran fast, and furious for a decade or so – they created a post bubble surely knowing it would undoubtably befall themselves once their neighbors across the pond imploded. What I see today is the indusrial (G20) world capituating too unrealistic fixes, and finally grappling with the very real crisis at hand – reinventing their collective consciousness where failure is not an option, period! We as Americans should have seen the creeping euphoria bestowing the masses. The question we should all ask ourselves – that is our leaders – didn’t they see the wild fluctuation of oil being priced that preceded the fall {oil at US $147/bbl. juxtaposed with the EUR/USD $1.58/$0.63 … WOW!, like clockwork,the timing was so strangely accurate?), and homes inflating year over year by 25% for years? The Europeans indulged in the same euphoria, but theirs was to be short lived? The euro became the world’s currency ,and oil was trading in euro value versus the sick dollar where this leaves me a bit confused, and disorientated. You see…I blame the Chinese for our weak dollar, but actually it could have been worse if our currency had inflated – devine intervention ,(actually the dollar is quite nicely priced at this moment in time, and it would be unfortunate if it were to inflate?) Mr Goldman Sachs? The analysis from the charts (EUR/USD & ^OIX) show the dramatic correlations of the two versus energy (always the culprit), but the good news is – once the two currencies realign – lets say back too the euro’s very inception we should be good, if…and only if we practice pragmatic ,and realistic financial (no agnostic’s, or atheist apply?) religion. Ironically…this would put the euro, and the dollar on a firm footing (~ parity @ $0.87: e0.87) thus letting the PIIGS get on with their business of balancing their books. Energy cost would no longer be a drag on the economies as in america, and China is in a slow-growth mode for the time being giving both sides of the pond time to catch their breath ,thus getting their house’s in order. The biggy is which will blink first with, “Real Financial Regulatory Reform” that works altruisticly – the Europeans or the American’s? I don’t expect the United States “TBTF” to change much, for the very fact that they coiuld actually live with a country owned by the Arab’s,or the Chinese? Sad,very sad,…but that’s how pathetic things are in the country today regarding our leadership heading into ultra-socialism with arms fully extended,…!Thanks Simon

  22. “If recent market sentiment signals a coming global downturn rather than continued world growth, investors will soon question whether even the safest havens are safe.”

    You guys are too much.

  23. Ted K: Put down the French, as Americans usually do. At least, that’s consistent.I am writing a little essay on the subject. In truth, it was the exact way around, and (hint)it involved Norway and the Netherland.
    If the French had stayed as you described, they would have won. Very quickly.

  24. In September 1939, Great Britain had no army, except a handfull of divisions: could not attack. The first British soldier showed up more than a month after the war declaration.

    Meanwhile 45 French divisions had attacked the Siegfried line, and American plutocrats had sent to Hitler’s war machine supplies it needed absolutely to keep on killing French and Poles.

    Many democracies declared war to Hitler in 1939, to join Frace and Britain morally. Only three (Sweden a lot, Swisszerland a little bit, and the USA, enormously) collaborated with Hitler. Then France bore the weight of the war, but killed 50,000 Nazis in the Battle of France.

    Hint: Please do not believe lying French hating, Jew killing, hanging material such as the mass murdering war criminal Keitel.


  25. The French mobile reserve of seven armored divisions had been rushed to the Netherlands!

  26. Russ: I am trying to handle the Herculean task of revealing the Maginot Line’s real metaphor. thanks for the encouragement. It has some bearing on the situation at hand.

    Americans tend to not understand the European construction. Europe died in the past of being as Babel. But now is completely different, and American destructive interference is futile: the trick of WWII will not work again. Philosophers are waiting… with the right metaphors, closer to the all enlightening truth.

  27. @ Rickk: Debt is somewhat irrelevant. The crisis is the pretext for necessary belt tightening. The French should bring back up their retirement (it used to be 65, now it’s 60!)Germany has tightened up already severely in recent years, hence part of the problem.

  28. Just a picky picky. I think DSquared has a rant about the use of basis points. I think his argument was that bp was the difference between two rates and one was the reference rate. When something increases it would be nice to know from what to what not just the % increase.
    Sorry about being picky that is just the way I am.
    Best to you all.

  29. Um wait a minute.

    Wasn’t the point of the Maginot line that the French anticipated that the Germans would only attack via their common border – and instead the Germans used a 3rd party route via Belgium?

    That is, the Maginot line was not forcing the Germans to take that particular route, it was built (at great expense) upon the assumption that the Germans would attack across the common border and in fact the Germans chose a different route. Bad assumption.

  30. I think it’s been claimed that the most important part of economic life happens at the margin. (and as I think about it for a minute that’s where things change). So let’s say the margin here (European sovereign debt) is speculation. Yes I did use that word.

    Which prompts the thought that if that financial betting device of in principle limitless proportion, the credit default swap, were properly regulated these crises would be much less severe and maybe not even be crises. Why didn’t this sort of thing happen in the past? Were governments any less profligate? I don’t think so. But the opportunities to profitably bet against them – I don’t think that was there.

    People are always behind the curve. I’m guessing that ‘playing’ sovereign debt is the latest greatest game in town. With all the usual suspects whose names we know (and other shadowy financial firms we don’t know).

  31. Patrice,
    Was this before or after the French signed the Second Armistice with Germany in 1940??? You’ll have to forgive me, my American education is not so analytical as the French education.

    I found this picture online of the French General signing the armistice with Germany. I am linking this picture of French General Charles Huntziger signing that armistice, in case you need your memory jogged.

  32. Actually they (and the British) did expect the Germans to violate Belgium again, but they expected them to do it in the same neo-Schlieffen way they did in 1914.

    Instead the Germans took them completely by surprise by attacking through the Ardennes, which “conventional wisdom” had labelled impassable by tanks.

    When all their dogmas took that blow, they psychologically collapsed. The Maginot Line ended up being rolled up from behind, as an afterthought, practically without a shot.

  33. To me the Maginot mentality means that in the face of a threat one takes a passive, defensive stance based on the premise of “walling off” one set of possibilities in order to force the danger into a predestined path, where one expects to be able to counteract it.

    This depends completely upon:

    1. Your perception of reality (the array of possibilities) being accurate in the first place;

    2. that reality remains static in the interim, so your premises remain valid.

    As the events demonstrated, the first was wrong (the Ardennes route was a possibility) as was the second (the French will to fight at all, exemplified best by Munich, but also when they rejected Pilsidski’s pre-emptive war proposition, collapsed as they vegetated behind the wall).

    Meanwhile the passive-aggressive stagnation mindset is chosen instead of a more aggressive course of action (as was available and would have worked in 1938 or 1939, among other times) or instead of changing one’s own behavior to defuse the danger in the first place.

    So let’s do a quick application to today’s situation. To the extent that government and globalization cadres aren’t simply conscious kleptocrats (and I think the vast majority are), they’ve hunkered down behind the wall of belief in infinite growth, infinite energy, the social and environmental sustainability of the exponential debt civilization in general.

    So with the permanent Bailout they expect to keep the whole ponzi scheme going. That German and French banks, themselves insolvent, can keep lending the Greeks, Spanish, and so on ad infinitum enough money that they can indefinitely service their existing debt to those same banks (and I assume that in principle there will be more bailouts, meta-bailouts, to enable them to service what they owe on these bailouts).

    That sounds like satire, but they sound serious. To say the least, they’re hunkered behind the wall of their assumptions and expect reality to behave in a way very precisely laid out in their ideology and textbooks. Maginot mentality.

    Meanwhile they had the option of trying to save some aspect of the system by purging it of the gangster rackets and restoring debt-based fiat economies but on a “boring banking” basis only. I don’t think this could work on account of Peak Oil, but they could have tried it.

    Or, what I would have done, is recognize the unsustainability of the exponential debt/”growth” system, the futility of trying to zombify it forever, and the immense extra pain such attempts will inflict over the long run. Instead of bailing out Wall Street and global finance, we could have let it perish while using what real wealth remained to bolster Main Street and carry it through the growing pains of transformation to the relocalized, steady-state, post-oil economies which are in store for us anyway.

    This would have been hard, but far less painful and far more healthy for freedom, justice, and humanity, than the malevolent path the kleptocracy has taken of cannibalizing all economies and the earth itself to temporarily prop up their wealth and power.

    When I refer to the passive-aggressive Maginot mentality I refer only to the mindset vis-a-vis deflationary reality. But in terms of politics and humanity their policy is extremely aggressive, larcenous, and destructive. In that sense I’d compare them not to the French in 1940 but to their opponents.

  34. Re: @ Patrice Ayme____You’ve got that right Patrice! Greece as everyone has mentions, grossly abused the retirement/entitlement programs to the Nth degree – granted ,but so have the Americans. The individual states, municipalities,cities,and towns have fantastic retirement programs. Throughout the United States as a teacher,policeman,fireman,gov’t postal worker,bookkeeper,librarian, state college, Management Authorities,etc,.etc., – get the picture, can retire after “30 Years” with 80% of current (actual time of retirement wage) pay at 50-54 years old, assuming some entered the workforce right out of highschool/college respectively. But wait – it gets better? They’ve got it set-up – rigged is such a better word for the good-ole-boy system (incestual nepotism gone crazy?) that a new job is opened-up for a duel pension if they don’t want to retire that only requires 10years service to sweeten the pot, which basically doubles/triples their retirement income. Here in Florida,USA some of those very clowns are pulling down $250k lifetime, plus benefits, and these are just Town Administrators? So don’t cry for Greece, for the real “Crying Game” don’t want no more’, is at home! America is in deep,deep duda!

  35. Correct. The CDS/CDO innovation effectively morphed bondholders to stockholders with all the attendant methods of amplifying volatility.

    This amplification is whipping credit markets (and thus interest rates) as well as currency markets into a minute by minute gambling casino.

    These aren’t bond vigilantes, these are momentum driven stock speculators who now can apply their methodologies, and leverage, to credit markets.

    And they are dominated by the largest bank trading desks. Right now they’re furiously minting money at the expense of real economic activity in hopes that they can bolster balance sheets before the music stops.

    Oh, and they use inadequate math to estimate risk exposure. So they’re pretty much driving at night without headlights. Hope a Moose doesn’t wander onto the highway. Who could have guessed? A Moose, for heaven’s sake.

    Ummm. Having the headlights off was the problem. No?

  36. Sovereign Credit-Default Swaps Surge on Hungarian Debt Crisis

    June 4 (Bloomberg) — “Credit-default swaps on sovereign bonds surged to a record on speculation Europe’s debt crisis is worsening after Hungary said it’s in a “very grave situation” because a previous government lied about the economy.

    “The comments out of Hungary have really spooked the market,” said Rajeev Shah, a credit strategist at BNP Paribas SA in London. “Investors are interpreting it as bad sign for trying to tackle Europe’s debt crisis.

    “Are we on the brink of something more serious?” Deutsche Bank AG strategist Jim Reid wrote in a note to clients today.

    – excerpts

  37. I assume what “morphed bondholders to stockholders” means is that the new instruments transformed patient money into impatient money.

  38. I do not think that you have a good feel of what is going on in Spain right now. The main problem is that the politicians in charge cannot believe that the situation is as serious as it is and they are wringing their hands waiting impatiently for the day that things will be as “before”.

    The government is not serious about doing what needs to be done, just look at three examples.

    The recent cutting measures are window dressing for the EC and the markets. The freezing of pensions and pay reduction of public servants will mean €6 bn, about 0.6% of GDP, to help with a fiscal deficit close to 10% of GDP. The psychological impact of these cuts has been enormously negative, although you will not see it in the streets. You will see the impact in an attempt to increase the household savings rate (close to 19% now) and certainly in a reduction of private consumption, the Spaniards always react this way to bad news. This halfhearted attempt to cut the deficit is just for nothing, the increase in interest rates this year will be more than the savings achieved by these cuts. The outstanding debt of the central government is close to € 600 bn and just 1% interest rate increase is 6bn, as much as the savings. The public knows where the waste of public funds lays, the regional governments, 17 for a country with 45 million people, each of them structured like the central government with a president, 10 to 15 full-fledged ministries, a parliament, etc. The citizens would have taken much better the cutting “effort” if it had been accompanied or preceded by a cutting of the “waste”. But the government has done zero to cut the real waste and this has angered a lot of people.

    The big banking problems in Spain lay with the Cajas (50% of assets of the banking system) that are controlled by the politicians that use them as their ATMs and have been the cause of so many political loans gone bad. Instead of the privatization of the Cajas recommended by the IMF and wanted by the public, we are proceeding with a reorganization of the Cajas system injecting public money so that they can keep going as before with the politicians controlling the boards and no real reform. The Caja Sur example is a tiny one (a Caja controlled by the Church, by the way) and probably the only example. The public hates the politicians that collect big money as members of the boards and use the Cajas to fiance their pet projects. This would have been the time to do the privatization of the system, but it will not be done. The system will be preserved “as is” so that the politicians can continue sucking it and so that we can have another big problem down the road.

    The labor market reform will be a “light” version, so light that it will amount to about nothing. No free, inexpensive layoffs, no free negotiation of contracts, a big disappointment.

    Spain is fed up with their politicians, of all colors, that seem to have an especial ability to always choose the worst possible option for the country and the best one for themselves. The public is totally despondent, with a feeling of impending doom and it will not be easily encouraged to consume more and to look at the future with optimism. Expect another drop in the economy this fall.

  39. Re: @ Pedro Gonzalez____ Kinda like being lost in a “Petrified (Spain’s Gov’t) Forest” – postioned (geographically & fiscal austerity rank?) at the bottom of a inactive (complacent ministries,and parliaments, etc.,) volcano – seducing (Caja`Sur) your psyche (fiscal responsibility) by getting you intoxicated on a highly volatile antidote (mucho plus regional gov’t. bureaucracies) of denial – innocently (what, me worry?), violating you (general population) by sticking a wick (exit strategy?) down your throat, laced with remorse (to little, too late), and blowing you up with (post latent, lais`sez faire) reality! PS. What – if anything, do you suspect that is deterring the inevitable, other than said previously?

  40. I`m not an economist or a major investor. I moved to the USA from England in 1996 with a passing knowledge of European history and temperament. By chance,one of the first questions i was asked by an American citizen, believing me to be somewhat intelligent because of my accent, was ” how do you see the future of the Euro?”. I replied ” it is a great idea in principle, but as soon as there is an argument about money, the Germans will not like it and it will be business as usual”. I see no reason to change my opinion.

  41. The French seven armored divisions mobile reserve was sent to the Netherlands as soon as they, and Belgium, got attacked. The trick was devised by Hitler. It was a completely insane decision, and it is what lost the war. Had the French mobile reserve been kept in reserve, the Nazis would have lost all their armor, immediately, by being cut from behind, what precisely terrified the OKW. Details coming on my site soon.
    Never heard of a second armistice. There may be a confusion between signing by military officers and political decision by the unconstitutional assembly.

  42. They did not psychologically collapse. France kept on fighting. But, when it became clear that the USA would keep helping the Nazis, they called it quits. By then half of France was under the Nazi boot. But France still had huge forces, especially on sea and in the air, and could have fought from North Africa.

    But it was costly. The Nazis tried to seize Grenoble, but where ambushed, and so on. People were dying. 100,000 Franch soldiers died in a few weeks, and countless more civilians. Meanwhile, as I said, the USA was supporting Nazi Germany, and so was the USSR.

    Except for Britain, actively helping France, France was fighting the world. It was time for a time out, some traitors thought, as they could see that the rate of dying of the French was even higher than in 1914… a victory later grabbed by the USA… to (help) create Hitler…

  43. Germany has just decided to squeeze some more (retirement there is at 67 versus 60 in France). And it is true that a lot of USA salaries are completely extravagant, both in government and in the private sector. Some are extravagantly high, and many, too low. the extravagantly high, though, ruin public finance.

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