Euro Crisis At A Tipping Point?

[Owlet]

While OWS is important, it s also proving - unwittingly - to be a distraction from other problems. It's sort of like watching kids building a sand castle on the beach while the tsunami-warning sirens are going off. No, I'm not trying to minimize the importance of OWS or in any way demeaning the participants. It's just that other stuff is happening that may make everything else irrelevant. To whit, the Euro Crisis.

"The European sovereign debt crisis is rapidly approaching what could be a significant tipping point as it threatens to spread to the heart of Europe.  In recent days Italian 10-year bond yields have soared to 7.22% and today Spain was forced to pay 6.975% at its auction.  Even French 10-year yields have climbed to 3.71%, its widest spread over German bond yields since the Euro Zone was started.  All of this has happened despite large ECB purchases of periphery country bonds over the last few months and the installation of technocratic governments in Greece and Italy.

<snip>

The U.S. economy is far from immune.  Yesterday a report from Fitch Ratings warned of the increasing risks facing U.S. banks from the European crisis.   They said U.S. lenders "could be greatly affected if contagion continues to spread beyond the stressed European markets."  Significantly, investors don't have a lot of transparency from U.S banks in terms of the amount of exposure to various entities or the ability of their hedging strategies to hold up under crisis conditions." 

In other words, the banks aren't revealing their exposure in terms of Credit Default Swaps with European banks. Some estimates put the total in the trillions.


http://comstockfunds.com/default.aspx?act=Newsletter.aspx&category=MarketCommentary&newsletterid=1618&menugroup=Home

[dixiegrrrrl]

1. BS!! OWS is not a "distraction" from Europe's financial problems.

Hell, MSM carries little info about OWS as it is, but the business sections in papers and tv talk plenty about the economy.
Not to mention that anyone interested in money is more than capable of thinking about more than one thing at a time, during the day.
Jeez....only ONE event at a time can happen in the world????

[Owlet]

2. You're quite right

about folks who read the business pages being well up on what's going on in Europe. But I have yet to see any MSM outlet leading with a story about the risk of Europe blowing up and wiping out the very banksters that OWS is (rightfully) complaining about. A cop with a bloody forehead trumps news about Italian bonds going over 7% any day. That was the sole point of my post, which, evidently, I didn't make very well. I'll try to do better next time..:)

[golfguru]

3. I will not shed any tears if the banksters implode

Actually I am hoping that happens. It will be like much needed popping of a festering boil.

[bossy22]

4. you know there is a good chance that you would lose your job as well

if the entire banking system imploded. Think 9% unemployment is bad...try 19%. If the banking system implodes credit will dry up over night, forcing many businesses, from large fortune 500's to mom and pop shops will be no longer to fund their day to day operations. There will be missed paychecks, missed mortgage payments, people unable to buy food since they are unable to withdraw money from their bank account or that their paycheck that they rely on didnt come because their employer has no line of credit from which to use to pay them.

It would be 2008 x 10- look what happened the last time? We are still suffering the effects of the financial crisis- do you really want to go through that again?

[golfguru]

5. That is a complete red herring

Only those banks which either gambled in risky derivatives & MBS or those who made stupid loans are in trouble.

Why bailout the gambling or stupid banks? That same money used in TARP should have been loaned to the thousands of prudent and solvent banks, who could then loan it out to businesses & people.

For capitalism to work, the bad apples must be allowed to fail. There are plenty of good apples to take over their business.

[Yo_Mama]

7. No, that's not true

What happens is a cascade. The retraction of money involved in busting bad banks rolls rapidly over to companies in the Main Street economy, and they all have to curtail spending. This sets up a declining dynamic, with more people and companies losing jobs and being unable to pay their loans back. That rapidly shifts the disaster into your local CU or community bank.

It's the scale that's important. Keeping financial swings small enough so that we can let the bad financial companies fail should be the primary goal, but the US abandoned that policy and went European in the 1990s by repealing Glass-Steagall, and now we are primed for a European-type implosion.

[golfguru]

12. Pure conjecture & fear mongering!

In 2011 alone 90 banks have failed and ALLOWED to fail.

http://www.thestreet.com/story/11317554/1/two-banks-fail-2011-tally-at-90.html

Where is the cascading?

If a few banks on Wall Street fail, there are plenty of other big and small banks to divvy up their business and take it over. Just LOAN those banks the money, not those who take undue risks for sake of greed.

[bossy22]

13. because they were small and therefore had minimal global counterparty risks

what happens when major global banks go under is alot different. Just look what happened when Lehman Bros. went under- the money market started to collapse and major companies such as Mcdonalds were unsure they were going to be able to meet their payroll due to being unable to get short term financing.

The failure of another major bank would cause a similar cascade. Bank Runs are extremely dangerous- they can turn healthy financial institutions into bankruptcy messes in a matter of hours.

There were many people in the Treasury Dept. in 2007-2008 that believed what you believed- they were proven quite wrong....

[sendero]

9. Anything.

.... would be better than this. Really, this has to end and it will, no matter what the cost.

[Yo_Mama]

6. There's a real possibility that the international banking system is about to bust

Europe just rolled over last week. The situation is extremely serious. China is telling its banks to get serious about their exposures, and only G_d knows what will happen there. The US has only two more years of trillion dollar deficits left, and then we won't be able to run deficits either.

Spain and Italy are both on the chopping block now. That takes the situation well past the point at which there is enough money in Europe to bail out the European banks, so they will have to find another solution - more likely none, and a very severe recession with banks keeling over and dying for years to come will take hold in Europe.

The problem in Spain's banks is acute, and it's a large part of the reason for Spain's 20% + unemployment. When banking systems crash and lending has to massively shrink, the inevitable result is very high unemployment.

If you are prepared to tolerate 15% + unemployment in the US, then you can afford to let the banking system crash. If you aren't prepared to tolerate that, then you will bail out the best 75% of it, socialize the cost, and impose a two-decade regime of austerity to survive.

In the end, it's the average dude or dudette who always pays the freight.

[bossy22]

8. Who said we have a time table on our deficits?

The U.S. does not have a schedule in which we can no longer borrow after a certain date. In act, unlike the eurozone, we have a central bank which can act as our "lender of last resort".

[Yo_Mama]

14. Mr. Market

There's nothing preventing the ECB from printing money like mad, which the US is already doing. In fact, there appears to be some suspicion among bond traders that they are about to start doing so. And that has a lot to do with whether bond traders will buy bonds in a particular currency. Not getting paid back at all is one thing - getting handed a loss via currency deflation in comparison to either hard asset values (i.e. oil, wheat) or another currency is yet another.

Bond traders don't want to take a loss, and institutional investors can't afford to take a loss, so when you start printing money and inflation goes up, they demand much higher yields to compensate. So in the end, once debt gets to a certain level your access to borrowing is blocked regardless unless you have a current account surplus, which the US does not have and will not have for the rest of the decade.

If the US were paying 6% on its CURRENT debt held by the public (already issued debt), it would be paying about 4.6% of real GDP just for interest. (US current debt 10.3 trillion, US real GDP last reported at 13.352 trillion.) If the US racks up another 2 trillion in deficits over the next couple of years, and even if the economy grows 2% each year, our debt held by the public will be about 12.3 trillion and our real GDP will be close to 13.9, so 6% interest would cost about 5.3% of real GDP.

You can't run continuous deficits over the long run greater than the increase in your real GDP. That's math. It rules the universe. In fiscal year 2011 our deficit was 8.7% of GDP. Obama's jobs program would have required raising that to over 9% of GDP, which is why he ain't gonna get it and was basically greeted by laughter from Congress when he proposed it:
http://www.treasury.gov/press-center/press-releases/Pages/tg1328.aspx

In fiscal year 2012 we'll run a deficit over 8% of GDP. In 2014 we will not be able to run a deficit larger than 5% of GDP, so it's just about over for us.

You can believe the nonsense about CBs printing as an eternal deficit-funding machine, but it won't change reality. Any country can run high fiscal deficits for a few years, but then the country will be forced to change direction.

After the Italian losses, Mr. Market will not accept a US public-issued debt close to 100% of GDP without demanding either austerity (US no longer growing its debt relative to real GDP each year) or very high yields, which would force us within a year to stop growing our debt relative to real GDP each year.

That's why Spain just tipped over. It's not that they have high debt/GDP ratios right now, but they don't seem able to curb their ongoing deficits so in a few years they will be near 100%, and the markets won't take it. Further, they have a debt-loaded economy and they can't grow out of it by loosening.

The only time a CB with the ability and willingness to print saves you is when private debt (debt owed by companies and households) is very low, so printing money fuels very high economic growth - much higher than the inflation it causes. Because the US levered up so much in the last few decades, the Fed can no longer fuel very high GDP by printing money. And we have seen that. The Fed injected over 600 billion beginning less than a year ago, and got lower growth as a result due to higher inflation.

Krugman and all those agony-econocolumnists are dead wrong. What determines economic growth are debt ratios, not printing money or stimulus. If an economy is carrying high debt ratios in aggregate, then stimulus produces little expansion of real economy and printing money produces little expansion of the real economy, because too much of the income gains are siphoned into servicing debt.

[sendero]

10. If we don't let it crash..

... it will be like paying off a kidnapper. They will be back again and again and again.

This has to end, and soon.

[OllieLotte]

11. I for one, am getting tired of this.

Iceland, Ireland, Greece, Italy and now Spain. I would rather the thing collapse now so the we can get on with our lives. Yeah, it;s gonna be rough, but its will be worse in a few years if we don't take the hit now.

[tama]

15. Actually

banksters and their crisis and money system collapse are the distraction - at least from the democratic point of view attention is needed in learning and building new way of life together to replace the collapsing distraction from what is good and right - what OWS etc are about.

[barb162]

16. I heard today the US is going to start stress tests on the banks very soon.

BOA goes first I think.