One of the primary focal points of our writing is the corruption that has become endemic to the political and financial elites of the world. When we refer to corruption we are referring to insider deals, cronyism, lies and fraud. Since the Great Crisis began in 2008, these have become the four pillars of the financial system replacing the pillars of trust, transparency, truth and reality that are the true foundation of capitalism and wealth generation.

As we regularly note, corruption only works as long as the benefits of being "on the take" outweigh the consequences of getting caught. As soon as the consequences become real (namely someone gets in major trouble), then everyone starts to talk.

This process has now begun in Spain.

MADRID -- Spain's governing Popular Party was drawn deeper into a web of corruption scandals this past week, after the Swiss authorities informed the Spanish judiciary that the party's former treasurer had amassed as much as 22 million euros, or $29 million, in Swiss bank accounts.

The treasurer, Luis Bárcenas, resigned from his job in 2009, after being indicted in the early stages of an investigation, which is still ongoing, into a scheme of kickbacks and illegal payments allegedly involving other conservative party politicians...

Nonetheless, the revelations have brought a fast-growing list of corruption investigations, which have unspooled across Spain, to the doorstep of the conservative government of Prime Minister Mariano Rajoy, who has so far remained silent. About 300 Spanish politicians from across the party spectrum have been indicted or charged in corruption investigations since the start of the financial crisis. Few have been sentenced so far.

Source: NY Times

Outside of Spain, corruption scandals have also erupted in Greece. There it was revealed that the very Greek political parties that were negotiated the Greek bailout had received over €200 million in loans from the Greek banks.

Greek prosecutors have ordered the two main ruling parties to testify in an investigation into more than 200 million euros in loans they received from banks, officials said on Friday.

The investigation - which is examining whether the loans are legal and whether any wrongdoing was involved - could embarrass the fragile conservative-led government, which relies on aid from the European Union and the International Monetary Fund.

Last year a Reuters report revealed the conservative New Democracy and the Socialist PASOK parties were close to being overwhelmed by debts of more than 200 million euros as they face a slump in state funding because of falling public support.

Source: Reuters

Here again, we find that politicians were "on the take" via questionable if not illegal funds. The fact that this story is coming out now does not bode well for Greece, which is barely holding together as a country.

The consequences of this discovery will not be positive for the Greek political class:

Greece's finance minister was sent a bullet and a death threat from a group protesting home foreclosures, police officials said on Monday, in the latest incident to raise fears of growing political violence.

The package was sent by a little-known group called "Cretan Revolution", which warned the minister against any efforts to seize homes and evict homeowners, police sources said. The group sent similar letters to tax offices in Crete last week.

Source: Yahoo! News

Italy is also facing a major scandal implicating key political figures including the biggest player for European financial system, ECB President Mario Draghi:

Back in mid-January, Bloomberg's Elisa Martinuzzi and Nicholas Dunbar reported that Deutsche Bank helped Italy's third-largest bank, Monte Paschi, cover up a 367 million euro loss at the end of 2008 with a shady derivative deal. That swap helped the bank look better than it really was just before taxpayers bailed it out--echoes of Goldman Sachs's deal to hide Greece's national debt.

The Italian papers followed Bloomberg's scoop days later with news that Nomura had structured a derivative for Monte Paschi along similar lines. The Italian central bank then disclosed Monte Paschi executives had concealed documents on the trades from them. Reuters reported that JPMorgan also did a sketchy derivative for the bank.

But the scandal only continued to grow. So far, the bank may have lost a billion dollars on the deals, and it turns out that the Bank of Italy knew about the allegedly fraudulent deals back in 2010, when Mario Draghi was its chief. Draghi is now head of the European Central Bank, and has been critical in tamping down the euro crisis in the last several months.

Now, the scandal threatens to change the course of Italian national elections being held later this month, giving a leg up to Silvio Berlusconi...

Source: Bloomberg

The key item in the above story is Mario Draghi's involvement. As head of the European Central Bank, Draghi is arguably the most powerful man in Europe. Indeed, it was his promise to provide unlimited bond buying that stopped the systemic implosion of Europe last summer.

In this sense, the entire EU has been held together by Draghi's credibility as head of the ECB. The fact that we now have a major scandal indicating that he was not only aware of fraudulent deals in 2010, but gave them a free pass will have major repercussions for the future of the Euro, the EU, and the EU banking system.

We hope by now that you see why we have remained bearish on Europe when 99% of analysts believe the Crisis is over. The only thing that has the EU together has been the credibility of politicians who we are now discovering are all either corrupt, inept or both.

To use a metaphor, if Europe were a single house, it would be rotten to its core with termites and mold. It should have been condemned years ago, but the one thing that has kept it "on the market" was the fact that its owners were all very powerful, connected individual. We are now finding out that the owners not only knew that the home should have been condemned but were in fact getting rich via insider deals while those who lived in the house were in grave danger.

As we stated at the beginning of this issue, corruption only works as long as the benefits of being "on the take" outweigh the consequences of getting caught. As soon as the consequences become real (in that someone gets in major trouble), then everyone starts to talk.

The above stories about Greece, Spain, Italy reveal that we have entered the stage at which people have begun to talk about Europe's corruption.

2013 is going to be a very interesting year for Europe.

Best Regards,

Graham Summers

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