Who's Supporting Who?

One widely held misconception right now is that Germany is carrying a broken Europe on its back. I explained to all the participants in wednesday night’s inaugural MBMG ‘Squawk Back’ that the reality is very different – a theme that I had previously outlined to CNBC’s Squawk Box team last month.

“So we have the EFSF rescue fund going to the market with some six-month bonds. I think yields can be manipulated to remain within reasonable levels, but it depends who's actually pulling the trigger and who's doing the buying. One thing that I think is very interesting is that the EFSF is starting to look more and more like a sub-prime CDO these days. In the years running up to 2008, we had all this junk, and you could put BBBs and CCCs together and call them AAA. S&P clearly learnt the lesson from that and they're not going to get caught in the same way again. Sadly, Fitch's and Moody's seem to be a little bit slow to pick up on the same thing, but the EFSF is just starting to look like a sub-prime CDO.

I don't think the AAA governments want to put any more into this. I think they've made that very clear. I think again, going back to December 9^th, going back to the Euro deal that was done, Germany wants to have absolute control of what goes on in the Eurozone. It wants fiscal control without the fiscal compact. It wants to set all the rules; it wants austerity, but it doesn't want to ultimately carry the liability, so I think the idea that Germany is going to put more into the EFSF is unlikely, but it may, behind the scenes, do much of the buying.

I think the collective fiscal resolve people talk about is the last thing we need. What that's going to do is to reinforce the fiscal policies of the last ten years of the Euro and what we've got in Europe (and Nouriel Roubini probably explained this better than most) what we've got is a symmetrical problem. Germany is producing all the growth; it's got all the competitiveness; it's where all the wealth is going to. That's being funded by the periphery with all the debt they are having to take on board, so a lot of people have got a mistaken view on Europe. It's the periphery that's been carrying Germany for all these years, not the other way round. We either need a transfer of wealth from Germany to Greece to allow that kind of transfer of competitiveness back to Greece, which isn't going to happen in a million years, or the only other option is to break the system and start all over again, and to us that means the peripheral countries leaving the Euro.

A few things are happening. One is it the ratings downgrade was heavily telegraphed and therefore people were expecting it; it wasn't a massive shock. And the other thing is this division between the ratings agencies, and the fact that Fitch's came out and said they guarantee that France will be given a AAA rating for 2012. That is absolutely bizarre to me. How any ratings agency can say that I don't know. What's Bill Gross's comment, that ratings agencies are full of people with MENSA IQs of 160 and common sense IQs of about 60? Unless they've got a crystal ball, how can they say France will be AAA?

The EFSF's AAA guaranteed 271 billion Euros is probably enough to come to the rescue of Greece in the next couple of months. It's probably enough to rescue most of the periphery over the next couple of months. It's not enough to go beyond that. We've been saying all along, what you need to make Europe solvent is a transfer of about four to five trillion Euros. That's what it takes to recapitalize the banking system so it's capitally adequate. That's what it takes to fix the broken sovereigns so that they get to a level where they are sustainable and they are repayable. We're not seeing permanent capital of four to five trillion. The EFSF was never that. It was only ever a stop-gap measure. The stop-gap's got a little bit smaller. I don't think there's any way to raise four to five trillion. The question is how long can they keep raising interim money that keeps the game going before the whole thing falls apart?