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Here is the headline from an Associated Press story earlier this morning:
“US stocks rise after new European budgetary pact
U.S. stock indexes rose in early trading Friday after 26 European nations agreed to consider tying their economies together more closely in hopes of preventing another debt crisis.”
Here is a reality check:
1. This agreement has to be ratified by each country before they have anything.
2. A closer fiscal union (with sanctions) means each country will have to give up its sovereignty to whom (Germany, The Central Bank, or?)
3. Based on their current financial situation, who will lend them the money at an interest rate they could afford with the Euro zone sliding into recession.
4. They need $3 trillion or more not the less than one trillion they hope to raise over the next three years.
5. Their Sovereign Credit ratings are likely to be downgraded soon by S&P resulting in even higher interest rates.
6. Their banks have not been recapitalized (unlike U.S. banks) and consequently have leverage ratios three times higher than U.S. banks.
Net: This new credit line on top of their old credit lines doesn’t make sense. But, using hopium might get them a few yards down the road to an even bigger crisis. And no, the IMF (International Monetary Fund) will not bail them out either. They do not have the money and to get it, they would have to get an appropriations bill through our congress as we would be liable for about 27% of the total funds raised.
Wait. I wonder, could Bernanke just give them the money with a couple of keystrokes with out telling us?
Showing posts with label european Crisis. Show all posts
Showing posts with label european Crisis. Show all posts
Friday, December 9, 2011
Monday, November 21, 2011
What Is The End Game For The European Debt Crisis?
Can Europe get out of its sovereign debt crisis by adding more debt? No. Can Europe grow its way out of its current debt problem? No. It will have a difficult time growing its economy at all next year.
To make matters worse, they have a banking system that is leveraged three times higher than the U. S. banking system. But, we’re not sure because of the lack of transparency in the banking system. For example, they do not have to mark their “toxic” bonds to actual, current market prices. They can price them just about where they want. The rules were changed to keep the banks from becoming insolvent. Just like the U.S.
But unlike the U.S., they cannot do what we did to keep the banks solvent. Their government structure and the limited power of their central banking system prohibit it. This could change with new legislation but it would take time and they would have to overcome the opposition from Germany. Germany has already experienced hyperinflation caused by runaway money printing (i.e., in 1923, Germany’s inflation rate was running at 10,000% per year.)
We all know what happened to Greece recently and the moral hazard of that “agreement.” If Greece could get a 50% reduction on $200 billion of debt and additional money to spend, why wouldn’t every other country be entitled to the same?
The result of that agreement has institutional investors selling European debt as fast as they can and are now coming after Italy; next will be Spain, then France.
Italy has $2.7 trillion dollars of debt and they and must rollover $300 billion of it within the next year. They do not have the money to finance this, if they could find buyers, at an interest rate over 5.5%. Last week they sold $3 billion with an interest rate of 6.1%.
As this unfolds, major banks will have to take enormous losses. Estimates are that U.S. banks have a $600 to $750 billion dollar exposure to European banks. This could cause serious problems for American banks.
I do not know exactly how this “debt crisis scenario” will unfold over the next two weeks, two months or two years. Will the ECB get the authority to print money so they can kick the can down the road a bit longer? There is, also, severe pressure on Germany to go along and let the ECB print. Germany will have to foot much of the bill.
Therefore, the end game it seems is either default or inflate their way out of this debt crisis.
Regardless of exactly how it unfolds, I think the banks are due for a serious correction. What is in question is the timing. We may be unable to prevent this European debt crisis from happening, but there are ways to preserve your capital or profit if you know what’s likely to happen ahead of time and can position investments appropriately.
To make matters worse, they have a banking system that is leveraged three times higher than the U. S. banking system. But, we’re not sure because of the lack of transparency in the banking system. For example, they do not have to mark their “toxic” bonds to actual, current market prices. They can price them just about where they want. The rules were changed to keep the banks from becoming insolvent. Just like the U.S.
But unlike the U.S., they cannot do what we did to keep the banks solvent. Their government structure and the limited power of their central banking system prohibit it. This could change with new legislation but it would take time and they would have to overcome the opposition from Germany. Germany has already experienced hyperinflation caused by runaway money printing (i.e., in 1923, Germany’s inflation rate was running at 10,000% per year.)
We all know what happened to Greece recently and the moral hazard of that “agreement.” If Greece could get a 50% reduction on $200 billion of debt and additional money to spend, why wouldn’t every other country be entitled to the same?
The result of that agreement has institutional investors selling European debt as fast as they can and are now coming after Italy; next will be Spain, then France.
Italy has $2.7 trillion dollars of debt and they and must rollover $300 billion of it within the next year. They do not have the money to finance this, if they could find buyers, at an interest rate over 5.5%. Last week they sold $3 billion with an interest rate of 6.1%.
As this unfolds, major banks will have to take enormous losses. Estimates are that U.S. banks have a $600 to $750 billion dollar exposure to European banks. This could cause serious problems for American banks.
I do not know exactly how this “debt crisis scenario” will unfold over the next two weeks, two months or two years. Will the ECB get the authority to print money so they can kick the can down the road a bit longer? There is, also, severe pressure on Germany to go along and let the ECB print. Germany will have to foot much of the bill.
Therefore, the end game it seems is either default or inflate their way out of this debt crisis.
Regardless of exactly how it unfolds, I think the banks are due for a serious correction. What is in question is the timing. We may be unable to prevent this European debt crisis from happening, but there are ways to preserve your capital or profit if you know what’s likely to happen ahead of time and can position investments appropriately.
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