Friday, September 9, 2011

Europe: More of the Same

I haven’t written anything recently about the Europe financial crisis because…little has changed.

Still the same old “kicking the can down the road.”

I am in the same place as Stephen King, chief economist at HSBC: “The totality of financial claims in now too big to be supported by the new economic reality.  In this world of economic permafrost, someone, sometime, will have to accept losses.  Will those losses accrue to taxpayers, recipients of public services, equity investors, bondholders, domestic debtors or foreign creditors?” (

His answer: “…any resolution seems a long way off.”

The response from the international capital markets?  Fear!

Yesterday the ten-year government bond of Germany closed at 1.88 percent; the ten-year United States Treasury bond closed at 1.99 percent.  Never thought I would see rates like this in my lifetime.  

The fear is driving investors into the safest things that they can get their hands on.  And, within this “flight to safety”, Europe…and the United States…just plods along with business as usual. 

Although we don’t agree with his prescribed remedy, Mr. King and I agree with what was written by Martin Wolf this past week. (  Mr. Wolf argued that the major problem behind all the “pussy-footing” around is that there is a substantial lack of leadership on the world scene. (

This lack of leadership comes out in so many ways.  Just take the case of Greek bonds and the value at which these bonds are carried on the balance sheets of European banks.  It seems as if these European banks can do just about anything they want to in terms of writing down the value of the Greek bonds they hold.

Floyd Norris writes in the New York Times: “British banks were most willing to swallow bad medicine and admit the bonds were worth far less than par value. Some German banks were equally forthcoming, but others were less so. Italian banks seem to have done as little as they could, but did take write-downs. French banks went the farthest to find ways to act as if Greek bonds were just fine.” (

So much for the “strong” rules and enforcement actions of international accounting and banking standards supposedly coming out of Europe.

Oh, yes, these are the European regulators that gave us the “stress” tests that were such a laughable matter.

The reason, to me, that no politician wants to stand up and take a strong position is that there are no good short-run solutions to the problems at hand.  The difficulty in taking a strong, longer-run position is that people are currently in pain and politicians must focus on “muddling through” to prepare themselves for the next election.

After all, the number one job of the politician is to get himself or herself re-elected. 

The difficulty faced by the politician is captured in the sub-heading of the New York Times article “Europe Steers Into a Zone of Uncertainty.   This sub-heading reads, “Path Out of Debt Crisis Involves Pain and Time.” ( The /09europe.html?_r=1&ref=todayspaper)

Imposing more “pain” is not a good way to get re-elected and taking too much time to achieve results does not match the timing of the politician’s next election.

And, where does the pain start?

Let me quote King once more:  “someone, sometime, will have to accept losses.”

Many of the governments in Europe are fragile because of the sovereign debt crisis.  Many of the banks in Europe are fragile because of the sovereign debt crisis.  There is rioting in the streets in Europe because of the efforts of governments to cut back budgets or raise taxes.

Yet, these same governments and public officials will not accept the reality of the situation…and so the crisis continues.

Steven Erlanger, tin the New York Times article just mentioned writes the following: “most experts agree that Europe’s crisis will persist until it adopts a far tighter fiscal and monetary union, expels weaker economies or divides into two, with different currencies. 

The hope among experts and economists is that the changes, if carried out with skill, may allow Europe to further isolate Greece and its unsustainable debts from other countries, reducing the risk of contagion and buying time for other countries to fix their budgets and work on how to better centralize control of fiscal policy. Though abstract on the surface, the changes will provide more flexibility to bail out or further restructure Greek debt, to aid Italy and Spain with their bond sales and even to recapitalize some European banks, weakened by their exposure to sovereign debt in the form of Greek, Portuguese, Spanish and Italian bonds.”

Notice three things: first, the reference to “experts”; second, the statement “if carried out with skill”; and third “though abstract on the surface.”  Sounds like success is just around the corner. LOL

It took fifty years or so to create this financial crisis.  We are not going to get out of it “overnight” and we are not going to get out of it without more pain. 

Again, “someone, sometime, will have to accept the losses,” regardless of what the “experts” say.

This is what happens when you become a “debt junkie.’

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