The ‘No Bailout’ Clause

The Lisbon Treaty was signed by EU member nations in 2007, as a sort of make-up treaty to correct some of the mistakes from previous EU treaties. Turns out, there’s a "no bailout" clause in the Lisbon Treaty. Who knew?

And by the time you read this edition of the Daily Profit, Germany’s Constitutional Court will have voted as to whether the EU’s bailout fund for Greece et al violates Germany’s democratic constitution.

This constitutionality question adds a new twist to the EU bailout issues because Germany is the only healthy European with enough loot to fund the bailouts of Spain, Portugal and Italy. It’s easy to see that, in a sense, Germany is being held hostage by its EU mates, and that Germany’s own democratic process is being subverted by the will of the indebted nations, and even the nations who may not be insolvent now, but might become so if Greece, or Italy, or Spain defaults.

German leaders Merkel and Wulff are not in an enviable position.

It’s been estimated that the EU bailout fund, the EFSF, needs nearly $1.5 trillion to effectively handle all of Europe’s sovereign debt problems. Many believe that Germany will not foot the bill.

Italy has to rollover 62 billion by the end of September and 170 billion by the end of the year. Who’s going to buy the bonds to keep the Italian government solvent? Only the ECB. And as The Telegraph asks: can the ECB continue to buy Italian (and Spanish and Greek) bonds if Germany declares such action unconstitutional?

Inquiring minds want to know.

The potential threat to German democracy is also the reason that Germany’s Angela Merkel has denounced the idea of a euro-bond, backed by all the countries in the EU. Clearly, such a move would make Germany directly financially responsible for the actions of other EU members. That’s about as anti-democratic as you can get.

What’s the consequence of Germany’s refusal to bankroll the EU anymore? It could mean dissolution of the Union, which UBS estimates would cost the indebted countries 40%-50% of GDP – in the first year alone.

Or it could mean Greece defaults and its bondholders take losses. This option, Greek default, seems inevitable at some point. But I’d say, if you bought Greek debt yielding 20% on the assumption that bailouts would make you whole, well, you deserve what you get.

The U.N. isn’t the only group that’s using some pretty harsh language to criticize the choice of austerity to solve post-crisis debt problems.

Yesterday’s Bloomberg carried the following quote from Dr. Doom, Nouriel Roubini:

"You need to restore economic growth, not five years from now, you need to restore it today…In the short term, we need to do massive stimulus, otherwise there’s going to be another Great Depression. Things are getting worse and the big difference between now and a few years ago is that this time around we’re running out of policy bullets."

The situation he’s addressing is obvious. Spending cuts are costing jobs and the economy is not growing fast enough to provide new ones.

It would seem that there’s some support building for the kind of stimulus that President Obama is set to announce tomorrow night. It will be interesting to see how his message is received by Congress.

Yes, Obama’s jobs message is two years late. And I understand that part of his plan is to give states money to carry out infrastructure spending. That’s the wrong way to do it, because that money will no doubt get sucked up by states trying to fix budget shortfalls. If the government is going to try fiscal stimulus, it needs to be direct government spending, not filtered through the states.

In the never-ending saga of Bank of America (NYSE:BAC), a couple key executives were fired yesterday. Yeah, that’s closing the barn door after the horses are long gone. The problem for BofA is the Countrywide acquisition, pure and simple. And it’s not going away until some kind of restrictions are put in place to keep BofA from being the mortgage piñata.

I believe JP Morgan (NYSE:JPM) and especially Citi (NYSE:C) offer some pretty decent upside, perhaps 20%-25% by year’s end.

Write me anytime: [email protected]

To top