The economic crisis in
Europe has reached a
crossroads, from which in all probability there is no return. The past many
months have been empty debate when the situation has further deteriorated.
Governments depend for their financing on the sovereign bond markets, where they can refinance existing debt, and raise new debt caused by deficit spending. Today bond investors are shunning these sovereign bond markets as they see unacceptably high risk or are asking interest rates that are so high as to be unaffordable for governments with mountainous debt levels.The Greek bail out and the cram down of bond holders also added a new element of risk that any new money from the Bail out funds would have a preferred status, thus driving away even more bond investors. In short the bond market has taken away from the politicians the control over the situation as regrettably was forseen by many observers for years.
A similar situation exists for weaker banks, which can no longer raise equity capital and long term bond financing. Thereafter they turn to their governments for assistance, which as explained above, they are no longer capable of providing. Such banks are also shut out of the interbank short term financing market, where banks lend to each other. The degree of mistrust between banks is so great, that instead of lending to each other, stronger banks park their cash with the ECB. The amounts involved are staggering, recently approaching EUR 800 Billion. The cash starved banks can obtain finance from the ECB but only on presenting valid security for these loans. We have now reached the stage that these banks have pledged virtually all their assets already, and can offer no security in exchange for more cash. The famous LTRO of EUR 700 Billion last year enabled weak banks access cash, but doomed them in the market, where their share price collapsed, as it was a flagrant proof of weakness. Also when the bank used the cash to buy their sovereign bonds, the market now knows the further losses they incurred. For all these reasons a further LTRO 2 looks very unattractive.
Thus we have reached the stage where both soverign countries and their major banks have reached the limit of their borrowing capacities when their actual borrowing requirement increases exponentially, and as explained above the EU and ECB interventions while creating a short term fix have made matters even worse.
Although this crisis has been many years in the making, historians may well come to regard the weekend of the French and Greek elections as the turning point.
Mr Hollande was elected on a platform of reducing retirement age, giving sweet deals to bureaucrats, increasing spending to generate growth, and using other people’s money to pay for it. This of course appealed so much to the French electorate that Mr Hollande a man who has never held ministrerial office, has taken the reins in
most difficult hour. He looks set to consolidate the socialist party power in
this weekend’s local elections. France
the polarisation in politics has cannibalised the centre left and right parties
and is making way for irreconcilable extremes. Austerity has slashed living
standards for the ordinary Greek citizen, while many abusive anomolies remain.
In hospitals the situation is so desperate that Cancer patients are no longer
getting medication and the most basic hospital supplies are either rationed or
not available. Many state employees have simply not been paid, and private
businesses are shuttering their premises. Greece
There is an election this weekend and at this stage it is to be hoped that whatever the errors of the past the country remains governable and does not degenerate into anarchy.
The financial situation in
has been debated to death. The economy is contracting, while the tax revenues are
dwindling. The monies handed over to Greece Greece
have essentially been recycled to bail
out of the insolvent banks in Northern Europe.
Virtually nothing remains in .
When the Greeks do not wish to play the game of getting even more indebted, it was even proposed to hand the cash directly
to the banks and send the Greek government the bill. Greece
situation is increasingly coming to the surface. Firstly Prime Minister Rajoy
said that Spanish banks had no problems and did not need any financial assistance,
secondly Bankia reported a profit and a few days announced later a whacking multibillion loss. Then Mr Rajoy
reaffirmed that the problem could be handled in Spain , and a few days later went
cap in hand for a EUR 100 Billion bail out, for the banking sector only. Spain
Informed sources estimate the banking bail out, to cover primarily real estate losses, alone should be of the order of EUR 400 Billion Then there is the problem of spendthrift out of control regions, and the funding of the massive social security commitments of a country where youth unemployment is running at over 50%. Stopping the latter payments could lead very rapidly to serious social unrest.
This is reflected in
cost of 10 yr borrowing at around 7% in today’s market. This is reported as
excessive, which is simply not true, When Spain borrowed in Peseta’s, interest
rates were much higher, which curtailed
the borrowings.. Debt levels are the real problem. Spain
where the EU nominated Mr Monti to became
technocratic Prime Minister, the situation is equally grim. The debt/GDP is
approximately 180% but at least Italy
does not have a colossal real estate bubble. However their banks also have
shaky balance sheets and the economy very weak. Italy
The inherent risks are reflected in 10 yr borrowing costs only slightly lower than
In the past the commitments and contingent liabilites were never really considered by Governments as cash liabilities as nobody foresaw that they would ever be used. This is rather like an insurance company not collecting a premium and never expecting to have a claim. Now however all the signs are that each and every one will be called to the full and there is absolutely no cash availaible to meet these demands.
Each country has also realised that the sooner you get in line for a bail out, the better your chances of not being asked to contribute to another country’s bail out.
The quickest way to achieve this is to make sure one of the country’s too big to fail banks has a run on funds, a crashing share price and is on the edge of bankruptcy. At that point the Government will promise to bail out the bank and run cap in hand to the EU for funding, and announce oh by the way we also need cash for the other banks.
We are also seeing
threatening to join the queue Cyprus
What Monti does know is that with
Portugal, Ireland, and Spain
and potentially Slovenia and
out of the game the burden falls on those left standing. Cyprus on its
own may just survive but is in no position to shoulder its share of the burden
imposed by others. Italy
France with high Debt/GDP ratio, increasing
deficit spending, massive EU contingent
liabilities, and its domestic banks
overcommitted to Spain, Italy and , could go under overnight.
Mrs Merkell has strongly criticised Greece France
today for its present policies as she rightly fears a situation where , instead
of being an ally becomes yet one more liability. France
There is no way
virtually alone could
redress the situation. The amounts of money required to rectify the situation are
would have to take on massive debt burdens much higher interest costs and lower
its standard of living to that of the EU average, while continuing to work much
harder and being far more productive. This is a tough sell to a teutonic electorate,
already widely disliked by those they
would help. Germany
The extraordinary thing, never mentioned by the EU political elites, is that even if the slate were wiped clean, the imbalances which created this mess, differing productivity, same exchange rate, same interest rate for all, would create the problem all over again.
In summary, sovereign states have run out of cash simultaneously and cannot access the credit markets on acceptable terms for the amounts needed. The major banks with few exceptions are in the same situation.
The EU rescue mechanisms ESM/EFSF meant to save individual states in difficulty are largely unfunded, and there is no legal and political agreement as to how the funds should be deployed. Even if totally funded they are perhaps adequate to deal with
Greece and Portugal, but are completely completely overwhelmed by
the scale of the problem posed by , Italy et al. Spain
This in financial parlace is “Contagion” but in reality it simple arithmetic. These numbers have been known for years. The problem is that the philosophy of “extend and pretend “ so loved by politicians, has its limits. Ultimately it transitions into “lie until you die” which is where we are today.
The problem has never been
despite all one reads in the media, contagion has always been the problem. Contagion
can only happen when all the others are only slightly stronger than the weakest
At some point very soon this festering situation has to explode and when it does
Europe and probably the world will never be the same