Interactive graphs from Reuters.
Posts Tagged ‘European Debt Crisis’
From Janet Daley:
“Consensus” has become coercion. The imperatives of federalism and ever closer union have come bang up against the basic principle of democracy: that elected governments should be answerable to their own electorates, particularly on matters that affect the lives of ordinary citizens, such as taxation and public spending. Federalism cannot allow democracy to disrupt its objectives, and democracy will not permit federalism to ignore its anger and frustration.
Angela Merkel cannot do what her critics are insisting that she must do – as George Osborne put it, show that she recognises “the gravity of the situation” and is “dealing with it” – because her electorate will not wear it. She cannot commit herself to endless bail-outs and the under-writing of infinite Mediterranean debt, just as the Greek government cannot deliver the EU’s austerity measures – because the people of both these countries do not wish it. The irresistible force has met the immovable object.
In 2007, the idea of a 150-year-old investment bank worth $60 billion one day and worth zero 19 months later seemed patently absurd. But it happened. And more recently, bankruptcy in one-third of the euro zone seemed equally ridiculous. But that’s what we now face.
The so-called PIIGS of the euro zone — Portugal, Ireland, Italy, Greece and Spain — make up 135 million of the currency union’s 300 million residents. The nations also account for roughly $4.5 of the $12.5 billion in nominal GDP for the euro zone, according to recent World Bank figures. All of these nations are facing serious debt trouble, and the sad reality is that “contagion” is more than a buzzword. If one domino falls with Greece defaulting on its debt, the rest could soon follow as panic sets in and credit is refused to the rest of the troubled PIIGS states.
Germany would be stupid to abandon Greece because of this possibility, but that doesn’t mean a Greek default won’t happen.
Consider that credit default swaps on Greek debt were as high as 3,500 basis points last Friday — and that it costs $5.6 million up front and $100,000 annually to insure $10 million of Greek debt for five years. The market clearly sees the threat of a breakdown as very real.
So predicts John Ellis:
At the center of the storm sits German Chancellor Angela Merkel, who is being told by one and all that she must take extraordinary action to save the day. But the truth is she doesn’t have the authority to do so, doesn’t have the votes, doesn’t have the political throw-weight to over-ride the judicial, legislative and political vetoes. She won’t save the day because she can’t.
So what does she do?
In the days leading up to the collapse of Lehman Brothers, then French Finance Minister (now IMF Managing Director) Chistine Lagarde told then-Treasury Secretary Hank Paulson that he could not allow Lehman to fail. The ramifications would be catastrophic, she said. She was mostly right.
Three years later, it will be Angela Merkel talking to President Obama,Treasury Secretary Geithner and Federal Reserve Bank Chairman Ben Bernanke with exactly the same message. The United States government and the Federal Reserve must come to the rescue of the Eurozone or the ramifications will be catastrophic. And she will say that she needs roughly $1 trillion in financial guarantees and liquidity support. That’s the number that will calm the markets.
She will do this publicly (it will be leaked to the FT or the NYT) because (a) she wants to maximize the pressure on the US to ride to the rescue and (b) she wants the blame to fall elsewhere in the event that the “situation” goes haywire.
It’s quite a theory. Far fetched? I hope so.
How come European banks have got so much of the stuff [sovereign debt]? Well ironically, this is one lending decision gone wrong that the banks cannot be blamed for. In response to the original banking crisis, regulators ordered banks substantially to increase their liquidity buffers. Government bonds are generally viewed as the most liquid and least risky assets to hold, so that’s where the money went.
That these regulatory obligations also helped governments fund their ever growing deficits is by the by. In any case, nowhere is the law of unintended consequences more in evidence than in financial regulation. By seeking to address the last crisis with greater liquidity buffers, regulators succeeded only in sowing the seeds for the next one. A banking crisis that transmogrified into a sovereign debt crisis now shows every sign of transmogrifying back into another banking crisis.
It is not impossible that the euro zone will be able to muddle along a bit longer: Greece may have done just enough in its latest plan to cut spending and raise revenues to receive the next tranche; the German parliament may be coaxed into approving the July decisions; the revamped EFSF may then be able to take up the bond-buying task from the ECB and a problem may be found to the problem of Finland’s demand for collateral. Then what?
The situation is so dire that any bit of bad news would easily cause another collapse in the markets. So at the same time as Germany is talking of giving up on Greece, it is also talking about redesigning the euro zone. Done right, a new European architecture may ensure that such a crisis does not recur.
But as Barry Eichengreen points out, the problem is now, not tomorrow. It will take years to renegotiate and ratify new treaties, even assuming there is no blockage of the sort that beset the Constitutional Treaty. But the euro zone faces critical days and weeks.
Germany will likely kick Greece out of the eurozone, which will render its debt worthless. But the banks have only written down a portion of Greek debt on their balance sheets, hardly mark-to-market. With a unprecedented level of funding coming due during next year’s first quarter, the ECB has a daunting task ahead. It’s not pretty.
Read the whole thing.
Posted in Economy, European Debt Crisis, tagged Ann Althouse, European Debt Crisis, Landon Thomas Jr., Lehman Brothers, Moral Hazard, Nelson D. Schwartz, The Drudge Report, The New York Times News Analysis, Too Big To Fail on September 7, 2011|
The Drudge Report is currently linking (in red and in CAPITAL LETTERS) to a breathless front-page New York Times “News Analysis” by Landon Thomas Jr. and Nelson D. Schwartz, proving once again that the Times is never the best place for financial news — or responsible “analysis” for that matter.
Unfortunately the piece, “In Euro Zone, Banking Fear Feeds on Itself“, does not give readers the basic facts or background to understand financial institutions in general, the history and structure of the Euro and the Central European Bank, the current European economic and political climate, or general economic principles. That’s what’s so breathtaking about this article.
The authors refer repeatedly to Lehman Brothers, its failure in 2008, and their comparison to it and contemporary European banks. The comparison sets the basis for many of their assertions, but left out of the analysis are facts that turn this front-page article into a dangerous diversion. For example:
- Lehman Brothers
- Lehman Brothers was an investment bank, and as such, American law prohibited it (by and large) from offering cash deposit accounts, and thus did not require insurance from the FDIC for up to $100,000 per account (the guaranty was raised to $250,000 during the Bush administration). The lack of FDIC insurance significantly reduced incentives on behalf of the United States to ensure the bank remained solvent because there were no guarantees on deposits. Moreover, there was no concern of a “run on the bank” from panicked depositors.
- European banks (some of which also act as investment banks) have billions in cash deposits, which are insured — not by a pan-European entity (like the federal FDIC in the United States) but by the nation in which the banks reside. Some countries, such as France and Germany, have no limit of insurance on each account. Have a million in your checking account? No problem, if your French bank fails, the country’s tax payers insure every euro. Obviously every nation with a troubled big bank with insured deposits has a vested interest in seeing any weak banks remain solvent.
- The authors assume Lehman’s failure caused a world-wide financial panic in 2008.
- The failure of Lehman Brothers was a symptom of the economic crisis of 2008, not the cause of it.
- After the U.S. government bailed out Bear Stearns earlier in 2008, the market assumed it would do the same for the too-big-to-fail Lehman Brothers. This is what economists call “moral hazard”. So what a surprise it was when the government said it didn’t have the legal authority to do so and refused, allowing the bank to fail. Investors started to ask if JPMorgan Chase, Citigroup, or BofA could also fail, thus panic ensued.
- The panic subsided only when government officials began taking actions that provided expectations that these large institutions were indeed too big to fail and would ultimately enjoy a bail out if need be — much of what we’re witnessing now in Europe.
- Deposit insurance
- If an Italian or French bank fails, it is the responsibility of Italy or France to insure the deposits, not some European entity based in Frankfurt or Brussels. European policy makers may be “determined to avoid such a catastrophe”, and “are prepared to use hundreds of billions of euros of bailout money to prevent any major bank from failing”, but do these “policy makers” have the legal standing to do so? A German court will tell us on Wednesday. But even if the court approves, what are the political ramifications? The Times analysis fails to tell us. How many euros will Germany provide to shore up a French bank? Or an Italian or Greek bank? Who leaves first? Greece? Portugal? Or Germany?
- The authors go on: “Turmoil in Europe could quickly spread across the Atlantic because of the intertwined nature of the global financial system. In addition, it could further damage the already struggling economies elsewhere.” This is rich. Later in the article, the authors say, “Investors also continued to seek the safety of United States Treasury bonds.” Do the authors realize the percentage of Treasurys purchased by European banks, investors, and governments?
- Quoting George Soros, identified only as a “hedge fund investor”, the Times notes how he cites the lack of an authoritative pan-European body to handle a banking crisis of this severity. “That is why the problem is so serious. You need a crisis to create the political will for Europe to create such an authority, but there is still no understanding as to what the authority will do.” Really. George Soros opines in a New York Times “analysis” with nothing, I suppose, at stake for such an opinion?
- Cross-border exposure, as noted by the authors, does not specify the assets held by American financial institutions, but the reader is left guessing if it’s government exposure? Bank exposure? Is it collateralized? Guaranteed? We’re left wondering.
I could go on, but what’s the point? There’s no question that the Euro debt crisis is real and the consequences are significant, not only economically, but politically; not only in Europe, but here in America.
So how about a shout-out to Messrs. Thomas and Schwartz? Here goes:
- The financial complexion of a bank is simply a result of the underlying economy in which it operates.
- The market continues to believe that most large European (and American) banks are too big to fail. The expectation remains that governments will bail them out if necessary.
- There are only so many taxpayer funds available to provide bailout money to large banks. It’s quite conceivable that politicians will one day realize the limit of tax dollars and concede that there aren’t enough to save all of the banks. If that happens, there will be another liquidity crisis, only worse than what we witnessed in 2008.
- That European banks are in crisis is a symptom. The problem is that governments have borrowed too much. And governments are reflective of the electorate. When forced with austerity measures, the Greeks decide to riot. And so do other Europeans. And yes, so do Americans. Don’t believe me? Read Ann Althouse for the best commentary on Wisconsin’s realty check.
- Worldwide de-leveraging is a deeply painful process. No Soros-promulgated “authoritative pan-European body” or other bureaucratic panaceas will ease the pain of understanding that asset prices must reach equilibrium. Individuals, municipalities, states, and nations have all borrowed more than they can comfortably repay. Borrowing from our children and grandchildren is not the road to prosperity for us or for them.
- Again, taxpayer bailout money is finite. Every tax euro (or dollar) must be earned before it’s available to government entities.
- If a bank (or any financial institution) is too big to fail, then it is simply too big.
As this sophomoric “analysis” article ends, the authors apparently believe the simple answer is more bank capital.
Huh. More bank capital and our troubles are over.
If only it were that easy.
UPDATE: From CNBC: Stocks Soar as Italy and Greece Act on Austerity
Despite the fact that George Soros is warning the euro zone debt crisis could be worse than the Lehman Brothers crisis, stocks across Europe rallied Wednesday following news from Athens and Rome on how they plan to tackle their budget deficits.
On Tuesday, Silvio Berlusconi’s government unveiled how it plans to make up the recent concessions on austerity spending it had promised a number of special interest groups.
Italy’s value added tax (VAT) will be raised by 1 percentage point to 21 percent. Those earning over 500,000 euros (US$705,000) will be subject to at 3 percent levy, which Reuters reports will raise 35 million euros (US$49 million) next year and 88 million euros (US$123.4 million) a year from 2013.
The measures where welcomed by the European Commission, which said they showed Italy’s determination to meet its fiscal targets and deal with its deeply rooted structural weaknesses.
However, the judges did say parliament’s budget committee must have a bigger say in any future bailouts.
“The government is obliged to get the approval of the parliamentary budgetary committee in cases of large expenditures,” said presiding Judge Andreas Vosskuhle.
The ruling was a victory for Merkel’s government policy
The decision will likely make it more difficult for Germany, and therefore Europe, to move quickly on future eurozone bailouts.