Europe's Long Summer Gets Longer

We have some two weeks to go before I stop wearing all white. I know that its rude to wear white after labor day but will European markets get the message?  Will European markets start to wear black?

We are headed into the fall with zero clarity on the EU.  There is little evidence that progress has been made on the issues that threathen the currency union. The EU is just waiting and hoping for better times. Hope is not a plan. Europe needs to restructure its sovereign debt. Its this failure to restructure that will upend the global economy.

Trichet and his 40 thieves were able to buy some time with the fraudulent EU Stress Tests in late June. They waived their magic wand over their banks and poof the sector all rallied some 20%, this allowed European credit spreads to narrow and equity markets to rally. Unfortunately, the same problems remain. Poof happened to change the sentiment, but the overvalued sovereign debt still remains. What remains are the same problems in the EU. Other than Germany and France, the EU can't compete and cant pay back its debts. Its this one metric that will bring down European banks. The US Stress tests were bogus, but at least they pretended to be somewhat realistic. US Banks were forced to raise some $75B, while EU Banks were forced to raise only 3B Euro. This is absurd and downright fraudulent.

The German economy is kicking on all cylinders. France is doing somewhat better. But the PIIGS countries are already sick and getting terminal. Greece and Ireland bond spreads are at historic highs. Austerity is not working in Gyro Land. The unemployment rate nationally is over 12% and is reaching 70% in certain areas. Ireland has far too much public and private debt which is about to overthrow their banking system.

After the 1T Euro Bailout and the Euro Stress Tests, we still have investors trading away from PIIGS debt. 10Y Greek Bond yields have exploded some 850 basis points higher than German Bunds. Irish bonds have also taken it on the chin. At least the Greeks tried austerity, the Irish haven't even done that.

The ECB, EU, and Trichet all seem to be living and forecasting off of German exports. This can't continue. The Euro has been weak for the last 2 weeks crashing from 1.34 to 1.26. German Finance Minister Axel Webber who is normally a policy hawk is talking dovish, this is alerting to everyone that the European banking sector is in deep distress. On top of this Anglo Irish Bank just dumped another batch of loans onto NANA at just 38.1% of their face value. Even this is optimistic pricing. This is just Ireland we are talking about. Spanish bank debt probably is valued at the same. Spain has been able to auction off more government debt, but looking at the finer points, only a few banks (BBVA/Santander) are in their buying. These banks just immediately REPO the Spanish Debt back to the ECB. Its a colossal pyramid scheme. 

The underlying problem is this.

European Banks can't support their debt. Europe can't support their banking institutions, honor all of the bank debt, increase its competitiveness of the weaker countries, and hold on to one single common currency all at once. Sentiment and market confidence will not fix this problem. European policy makers have made the statement that European banks will not be allowed to fail. Even a modest restructuring is at the moment out of the question. The banks and financial sector - Surprise! Surprise! -  run the continent.  The prevailing policy is debts over the taxpayer. This is a strategy that generally leads to the gallows.