Wednesday, July 20, 2011

Where Are The Leaders In Europe?

The story unfolding in Europe in a nutshell:

“Undercapitalized banks are supporting over-indebted governments by holding their IOUs; over-indebted governments are supporting troubled banks; and there is insufficient equity in the European banking system to absorb the losses implicit in the solvency gap.  The outcome is that the European Central Bank ends up providing liquidity on an open-ended basis to the peripheral countries to keep their banking systems afloat at the cost of an ever weaker balance sheet.  The one surprise in all this is that more of the retail deposit base of southern Europe has not disappeared in capital flight.”

From John Plender, “Time for Eurozone Policymakers to Grasp the Nettle”:

Almost everyone in Europe seems to have his or her head in a hole in the ground ignoring reality.

Anytime we hear anything from them it is always about who is to blame for the current crisis…the international banking community…greedy speculators…rating agencies…or the cheating being done in world class men’s soccer. 

Real leadership seems to be totally absent from the scene.

Few make such a blatant claim as the New York Times did this morning: “Greece is effectively insolvent.” (

There, I wrote it!

Greece is effectively insolvent!

It is not the international banking community that is causing the problem.  It is not “greedy speculators” or the rating agencies causing the problem.

The problem exists because of what the Greek government has done.  (For another take on this see Thomas Freidman’s column in the New York Times this morning:

Countries…people and businesses…cannot live way beyond their means forever. 

Greece did this to itself, and now the debt is coming due.

Does the Greek debt need to be written done?  You betcha’!

Will the write down be around 50 percent of face value?  That is what the market seems to think.

Can the banks holding Greek sovereign debt weather such a hair cut?  Certainly the “cowardly” stress tests just administered by the eurozone officials give us no such information about this possibility. 

However, sufficient information has been made public about the balance sheets of eurozone banks to indicate that many banks (many more than the nine identified by the stress tests) might have a “hard go” if this amount of a write down did take place.

But, we are in “hard go” country…thanks to the leadership in this area of the world.

Leadership that postpones dealing with problems is not leadership at all. 

“If one says that the problem is ‘out there’…that is the problem!” One of my favorite quotes from Stephen Covey.

I have worked with many failed institutions and in every case when one reviews the records, previous management never assumed that the fault was their own…it was always someone else’s fault. (Are you listening Mr. Murdoch?) 

As a consequence, steps were never taken to correct the problems faced by the organization and, therefore, the problems just got bigger and bigger and bigger.

The same has been true with Greece.

But, the contagion issue arises.  Is this the “Lehman Brothers” moment for Europe?  Will Portugal, Italy, and Spain follow in the footsteps of Greece?

These countries are not immune from the criticism leveled at Greece…and the statement of Plender above.  They have exposed themselves to the fate of the debtor and the debt collector is at the door.  Interest rates now paid by these nations on their debt are exorbitant and unsustainable. 

The losses must be absorbed…they cannot continue to be postponed in the hope that further credit inflation can buy them out of their dilemma.

Read my lips: the debt levels are unsustainable and must be dealt with now!

I like the quote at the end of the New York Times article quoted above: “The market is far more intelligent and resilient than a lot of politicians realize,” said Lee C. Bucheit, a lawyer who has handled sovereign defaults. “Investors realize that sometimes you make money and sometimes you don’t.  But they can’t abide prolonged uncertainty.”

I would close with a slightly modified statement: “Investors can’t abide a prolonged absence of leadership.”

Are you listening America? 

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