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Mile High Insights

Democracy Remains an Intangible


Rome is burning while the European Union is fiddling. This weekend, the finance ministers of the G20 were meeting in Paris, doling out dire warnings to the EU. Meanwhile, the continent's banks are unwilling (or unable) to accept larger write-downs on their Greek debt than the 21% they had agreed to in July. Trench warfare has ensued and bankers and politicians are finding themselves on opposite sides of the argument, which suits many politicians just fine, because now they can cash in on the mounting public anger that has erupted worldwide. Deutsche Bank CEO Josef Ackermann waxes poetically about the politicians' need to act forcefully in order to save Greece and the European periphery, but refuses to acknowledge his own banks role in the drama. Ackermann has long opposed raising capital (and capital requirements) for European banks, and he told CNBC that banks would face a competitive disadvantage as a result. What he forgot to mention was, that Deutsche Bank has a balance sheet bigger than most countries' entire economies and that during his tenure this same balance sheet was levered up to a 50:1 ratio. Of course he wants European unity, forceful action, political involvement to save Greece and more (not less) European involvement. The only thing he does not want to do is raise more capital. That would hurt his bonus and would dilute his shareholders and his career prospects. He would rather starve the Greeks and all of Europe rather than stabilize Deutsche Bank by taking the necessary haircuts of at least 50% and raising more money in the capital markets. "That would be anti-competitive." Is it any wonder that bankers have become enemy number one? Let's take a look and see if the bankers have a case.

The first chart shows gross government debt for Belgium, Ireland, Greece and Portugal from 2nd quarter 2008 to 1st quarter 2011. The trend is unmistakably upward for all four countries. The second chart shows the trade balance for those same countries. Greek data have been marked by European statisticians with a (p) for "provisional". No comment necessary. The Greek trade data for the 2nd quarter were not available, for obvious reasons. The point of this simple exercise is to show that Greece and Portugal through the first half of this year continue to run trade deficits, while government debt continues to climb. Both trends are unsustainable and need to reverse. Until that time, the sovereign bonds are bad credit risks. Portugal and Greece need debt reduction but they also need structural reforms, which is code for lower levels of job security, lower wages and lower levels of social security. Desperate measures are pushed upon the Greek and Portuguese citizenry because their governments are running out of time. No wonder people feel used and abused. They feel misrepresented and the money lenders have been easy targets for thousands of years. The EU is no longer the goose that lays golden eggs. It has become the ball and chain that prevents the poorest from reaching the Promised Land. There are no easy solutions and bankers, politicians and citizens all have their own scapegoats. Bankers blame government profligacy but refuse to acknowledge their own loose lending standards (some would say greed) that enabled profligacy in the first place. They were the dope dealers peddling to every "user" easy credit and cheap financing. Politicians were the dope addicts and now blame the greedy dealers ("greedy bankers") for the loans that the politicians only three years ago so desperately wanted in order to win another election through more social promises. They refuse to acknowledge that they failed to properly supervise a banking system that had run wild with speculation. The citizenry blames both bankers and politicians for letting it happen, refusing however to admit, that they elected the politicians for selfish reasons based on promises that lead to profligacy in the first place. Everybody as a member of one of these groups is guilty, even though none of them as individuals feel any guilt or responsibility. This is the stuff revolutions are made of.

The European idea is not easy to understand and voters in most countries do not see how it benefits them. The numbers above show clearly that elections remain to the average voter a very domestic or even local affair. The once strong relationship between social position and party choice is diminishing. Voter loyalty to a specific party or ideology is declining throughout Europe and the individual voter's decision to vote or not to vote depends on the immediate impact that a choice has on daily life. If there are no clear alternatives, or if the cost benefit to the voter is not clearly defined, the participation rate declines. Not surprisingly, we find in the above picture that countries which are net recipients of funds from the EU (Greece, Italy and Spain) show a higher voter turnout in European elections than countries that are net contributors to the EU. The European Election Database is a treasure trove of information in that respect. Public anger however is rising and an election every four years will not soothe the savage beast. The markets rallied for two weeks in hope of a political solution to the European crisis. The real problem, however, is not of a financial but of a sociological nature. Let the games begin!

Hermann Vohs

"Democracy is the worst form of government except for all those others that have been tried."

Winston Churchill

Hermann Vohs is president of Cales Investments, Inc., a registered Broker-Dealer. All material presented herein is believed to be reliable but we cannot attest to its accuracy. Investment recommendations may change and readers are urged to check with their investment counselors before making any investment decisions. Opinions expressed in these reports may change without prior notice. Hermann Vohs and/or the staff at Cales Investments, inc. may or may not have investments in any of the markets cited above. Hermann Vohs can be reached at 303-765-5600.

This information is not to be construed as an offer to sell or the solicitation of an offer to buy any securities.