Empire or bust

“They can paper over the cracks,” he said. “The political will is there.”

“So it’s empire or bust?” I asked.

“Yes.”

It was nearly midnight. We were in the smoking lounge of a grand private club in Whitehall, not far from parliament, following a black tie dinner.

The man sharing the gigantic button-back leather sofa with me was an insider. He’d deep connections with several major banks, and through our conversation revealed he was friends with at least one high profile EU technocrat.

The dinner had been a strange affair. Though around 20 people were in attendance, no side conversations were allowed. Instead, one man chaired the discussion. He introduced topics, and selected those who raised their hands to speak, one at a time.

Brexit and the EU had almost totally dominated discussion. I was pleased to find I was not alone in my concerns over the European banks. One lady stressed the danger posed by the bubble in European debt, and the risks it posed to the euro project as a whole.

But others took a completely opposite view, such as the man who now joined me on the sofa. In his view, the problems facing Europe created their own solution. A European banking crisis would be the necessary trigger for the EU to seize more power, so it could put out the flames. “Papering over the cracks” – bailing out the banks – would be the necessary push for a federalised EU.

I asked if he understood just how deep the problems were in the banking system. For regardless of “political will”, economic Mother Nature can only be denied so long.

He knew very well that Europe has a debt problem, but admitted he was not familiar with CRD 2013/36, which we believe is key. We wrote about this EU regulation in yesterday’s letter, which declares eurozone government debt “risk free”. With the backing of EU regulators, eurozone banks have bought huge quantities of that debt without having to hedge against it losing value. The EU has effectively endorsed the blind accumulation of risky assets (like Italian debt) by eurozone banks.

Of course no government debt is risk free, especially in the eurozone where individual governments can’t print their own currencies. When those debts lose value, the banks that have hoarded them face solvency issues.

The insider thought this would be fixed by centralising more power in Brussels to bail all the banks out. Further, he claimed that since Brexit the political will to do so has crystallised.

But what of the domestic unrest that turning Italy into Greece would cause? He didn’t think that would get in the way – I can’t see how it wouldn’t.

We parted in agreement that the EU cannot exist in its current form for a lot longer. Empire, or bust.

Super Mario Retirement

Meanwhile, one of the great orchestrators of this entire situation is close to setting a record as he nears retirement. Super Mario Draghi is set to become the first ever president of the European Central Bank to never have raised interest rates. He’ll be retiring in October, and markets expect the next rate hike in 2020.

Draghi knows where the bodies are buried in the Italian banking system. After all, before he gained the title of “Super”, he was the governor of the Bank of Italy (Italy’s central bank). The BOI, subservient to the ECB, is tasked with supervising the commercial banks and making sure they comply with regulations.

Draghi was there 2005-2011, and no doubt knows just how bad some of the loans were which were made over that period. He’s already been criticised for deals Monte dei Paschi made under his governance, which is once again having solvency issues despite already been bailed out.

Something tells me October can’t come soon enough for Mario. The woes of Europe’s banks have grown so vast that in the words of one wealth manager, “The big fish have been organising the expatriation of their wealth for some time.”

All the best,

Boaz Shoshan
Editor, Capital & Conflict

Category: The End of Europe

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