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The anti-establishment populist movement is expanding in the EU, and is now centered on Italy. Hungary, Poland, Austria and voters in Germany and Spain are pushing an anti-Brussels agenda, which is also anti-Germany. Italy is in terrible financial shape with a deficit that is now past impossible to rectify. The new government is pushing for a new budget that exceeds the limits set by the EU in Brussels. The new coalition is challenging the EU with a spending plan which is likely going to cause Italian bonds to demand a materially higher yield, and which may be unsalable to anyone other than the ECB. The European banks, and especially the German banks are already full up with Italian sovereign debt, and cannot risk taking any more. Draghi has told Italy that the ECB is not going to bail out Italy if they exceed the budget guidelines, and that would leave a bond yield through the roof, which would create large losses to the European banks holding Italian paper. While the ECB and Germany can cover the crisis in the short term, the ripple effects on the Euro and on bank credit in the EU could potentially be very bad. It is a classic damned if you do, damned if you don’t for the ECB. There is even talk of Italexit if things really go off the track.

Merkel is in serious political trouble and it is unclear how much longer she can remain in office. Possibly not much longer.  Even if she does manage to stay, she is having to create a new coalition, and she will be in a weak position. She has run the EU for the past decade or more, and if she leaves, the political chaos will be serious. There is no other leader right now who can have the power she had.  Complicating things is Brexit, which will come to a head in the next few weeks. If that gets resolved peaceably, it will help calm things a lot, but if it turns into a hard Brexit, things in the EU could get ugly quickly. You might then see a Italexit, or Hungary. We simply do not know what might happen. If we have a hard Brexit, combined with an Italian fight over budgets, and then Hungary and Poland and Austria piling on, things in the EU could turn very chaotic quickly. That is one reason the EU is anxious to resolve the trade issues with Trump, to get that risk off the table. It is also why you should stay away from Europe until thing get more clarity, which may be many months away.

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Joel Ross

Joel Ross began his career in Wall St as an investment banker in 1965, handling corporate advisory matters for a variety of clients. During the seventies he was CEO of North American operations for a UK based conglomerate, and sat on the parent company board. In 1981, he began his own firm handling leveraged buyouts, investment banking and real estate financing. In 1984 Ross began providing investment banking services and arranging financing for real estate transactions with his own firm, Ross Properties, Inc. In 1993 Ross and a partner, Lexington Mortgage, created the first Wall St hotel CMBS program in conjunction with Nomura. They went on to develop a similar CMBS program for another major Wall St investment bank and for five leading hotel companies. Lexington, in partnership with Mr. Ross established a hotel mortgage bank table funded by an investment bank, and making all CMBS hotel loans on their behalf. In 1999 he formed Citadel Realty Advisors as a successor to Ross Properties Corp., focusing on real estate investment banking in the US, UK and Paris. He has closed over $3.0 billion of financings for office, hotel, retail, land and multifamily projects. Ross is also a founder of Market Street Investors, a brownfield land development company, and has been involved in the acquisition of notes on defaulted loans and various REO assets in conjunction with several major investors. Ross was an adjunct professor in the graduate program at the NYU Hotel School. He is a member of Urban Land Institute and was a member of the leadership of his ULI council. In 1999, he conceived and co-authored with PricewaterhouseCoopers, the Hotel Mortgage Performance Report, a major study of hotel mortgage default rates.

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