John Mauldin over België

July 27, 2010 · 0 comments

John Mauldin heeft het in zijn nieuwsbrief vandaag uitgebreid over… België. Zijn voorspellingen voor 2012 stemmen tot nadenken.

“The standout surprise candidate for sovereign default by end-2012 is Belgium. Moreover, first glance at the numbers gives no particular reason to expect Belgium to default. Its potential financial problems have been on the radar screen for so long that we have grown used to them, rather like those many parents who fail to recognise the repulsiveness of their offspring. With net government debt of €400bn, it is hardly a huge world borrower in absolute terms. Yet default could occur almost entirely by accident and the ripples be far greater than its size warrants, because of its position as the de facto federal capital of the EU. Belgium’s hastening car crash is not in current bond prices or exchange rates. ”

“Turning of the taps. As the third richest region in Europe (after Luxembourg and London) it could in theory exist as a wealthy city-state cum federal capital, but such a dream is a chimera. Derided eurocrats live a life apart. Even Brussels-born residents who benefit from their largesse often complain that the many organisations have created rich ghettos from which they are excluded. That these eurocrats are out of touch has been demonstrated both by pay and expenses enough to make a third world dictator blink, and recent demands for pay rises.
There is a commonsense test to apply to the financial future of Brussels. Most European countries are net recipients of aid from the EU. Of the minority putting money in, Germany dominates. Other small contributors such as Scandinavia or the UK are co-joined triplets with Germany. Forced to slash their own capital, social, and welfare budgets following the financial crash, they will not put more into Brussels. It is a matter of time before each country decides to reduce its net or gross cheques written out to various Brussels organisations; hence the second most important engine of Belgium’s economy (after the wider economy of Flanders) suffers its first ever post-war squeeze. This means it has less largesse to spread around – particularly in Wallonia. Moreover, Brussels is no longer so logical a geographic centre for a federal capital since the EU expanded eastwards. This has not been lost on the Germans (Brussels’ most significant honey provider). Its press and politicians have suggested for example that NATO be moved from a largely neutral country with minimal military capability to one with a little more vim, such as Germany. France would murder to get its hands on more EU institutions. Even the UK, ever-equivocal about what it really wants form the EU, and outside the euro zone, would like a few pointless but foreign funded pork barrels like EURATOM. Such major political changes will take time. Turning off the money spigot is easier and will happen sooner. ”

“To repeat, the net €400bn national debt is chicken feed – less than half the loss racked up by America’s AIG in 2007-8. And in wealthier times, the dream then shared by most of its members, of a politically united Europe would have ensured a quick bailout led by Germany. Mrs Merkel has already discovered that small cash subsidies to the profligate, such as Greece, are very expensive electorally. So foot dragging and evasion are sure to be the political order of the day. As the divorce commences, little is gained in double guessing the next phase. Whether Flanders goes alone as a fabulously rich small state or joins up with Holland (now the religious issue is moribund) is a moot point. Equally, whether France chooses to absorb Wallonia into greater France (Sarkozy’s wild card to escape likely electoral defenestration?) or to subsidise Wallonia as a client state again, is also an unknown. On every topic, there is no agreement on how these regions should evolve, nor who is responsible for the debts, further ensuring delay. ”

“If markets have re-learned one lesson recently, it is that small events have disproportionate results. Belgium ranks as the world’s 20th economy by size, accounting for 0.8% of world GDP. Greece before the fall was No. 28, with 0.6%; its problems continue to shake markets, both because they were unexpected and because of the risk of a domino effect. So too would be the problem with Belgium. It is yet another reason why government bonds are toxic and why at some stage their yields will blow out, thus capital values fall.
Obviously, not holding Belgian shares on a medium term basis is sensible unless valuation work has fully taken account of these unexpected risks (clients have zero exposure). Once again the euro would fall and the German export machine boom. Equity markets would rattle around for a while but then absorb the key lesson. For Belgium is yet another example, as if one was needed, that the supply of government bonds over coming years will continue to soar to unprecedented levels even. All commodity prices tumble when the supply is perceived as infinite. Meanwhile, equities would benefit. ”