Message To Europe: Change Quickly And Profoundly

Europe appears to be dismembering. We see Spanish yields breaking well above 7%. The government bond market is essentially closed to private investors. The only funding for Spain -- and many of its political subdivisions -- is now institutional and governmental from elsewhere in the euro zone.

The sovereign default process in Europe resembles falling dominoes. It started with Greece and has moved on to Ireland, which appears to be attempting resuscitation on its own, Portugal, Cyprus and now Spain. The danger is that this sequential toppling of countries may be accelerating.

Remember that the euro zone consists of 17 separate entities. Germany is by far the largest. France is number two, Italy number three. Spain is, or perhaps was, number four, at about 12% of the total weight.

Then There Were Twelve
Each time a domino falls, the member state requires assistance from the remaining members. When Greece fell into financial disarray, then failure, the other 16 states had to provide the subsidy. When Ireland fell, there were 15. Portugal made it 14. Cyprus made it 13. Now Spain leaves 12 remaining.

As the dominoes continue to fall, the costs are reapportioned among the remainder, which is a shrinking cohort.

Beyond Worry
We are beyond worry about Spain. It is now a question of survival or failure for Spanish governmental finance.

The biggest country to worry about is Italy. Italian spreads are sending messages of danger and fear. Italy is the third largest debtor in the world. Its debt-to-GDP ratio is over 120%. Its economy is shrinking. The restructuring of Italian budgets has not included the necessary expenditure cuts for Italy to survive. Italy is now a troubled state.

Anywhere But France
France is the second largest country in the euro zone. It has imposed excessive wealth taxes. It has used the prospective collection of those taxes to balance, or improve, its budgetary mechanism. A year or two from now, those tax receipts will have disappeared. Why? French wealth is leaving the country. It's going to London, Basel and elsewhere. When you threaten to confiscate three-quarters or more of people’s wealth, you cannot expect them to hang around when they have options.

Wealthy French, Italian, Spanish, Greek, Portuguese, Cypriot, Irish and other citizens are voting with their feet. The financial flows reflect it.

European political leaders have yet to realize that they have to change their ways quickly and profoundly.

Cumberland is still maintaining a cash reserve in international and domestic accounts and has underweighted Europe. We have written about this many times.