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Caution Lights Flashing in Europe

By: Francis Cianfrocca (Diary)  |  May 7th, 2010 at 02:21 PM  | 

RESIZE: AAA

The situation in Europe in regard to Greek debt may be entering a new phase, and I’m talking about something more serious than tear gas and Molotov cocktails.

Now that the EU and the IMF have agreed on (and the key legislatures have ratified) a 110 billion euro bailout for Greece, the question has become: will it be enough?

Greece faces unusually severe austerity budgets, and probably a deep recession. Even with reduced government spending and a bailout package, it’s possible that they won’t be able to generate enough economic growth to stay ahead of their debt. In fact, that outcome is likely.

Attention will soon shift to the large European banks that are the holders of much of the Greek debt. If a default should occur or even appear more likely over the coming weeks and months, those banks will have a hard time doing business. And after the last financial crisis, many don’t have the balance sheet strength to weather the storm easily.

In my view, the only possible outcome that isn’t precluded by political problems (aka lack of leadership), is for the European Central Bank to print enough new money to allow the value of the euro to drift lower, possibly as low as parity against the dollar.

What you need to be concerned about is that signs of impaired interbank liquidity are now appearing in Europe. I get this from market data and from information from correspondents. It’s still very, very early, and I’ll be sure to retract this statement if conditions improve. And it may just be the uncertainty of the coming weekend, combined with the inconclusive British elections.

But a reluctance to take short-term counterparty risk is the same pattern that presaged the last financial crisis.

At this moment, there is NO INDICATION of any liquidity problems in the US. No spike in the Fed funds rate, no raggedness in repo or commercial paper. So far it’s all in Europe. Stay tuned.

This story first appeared at The New Ledger.

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COMMENTS

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  • justfedup

    I know it’s heartless, but maybe Greece needs to just collapse. Let the parasites of the world see what happens when they bleed a host to death. We have so many here that think enslaving others to pay for their “rights”is ok. Here is the oppurtunity for them to witness what happens when the nanny state craters. A lesson in socialism, in prime time. If you want something in life, work for it! Instead of sending money to the IMF, we can send Rev Al. With his genius, I’m sure he can fix it.

    • Francis Cianfrocca

      It’s becoming less and less credible that this bailout is going to work. So Greece probably will hit the wall. But the problem is that if Greece goes, it may leave some of its lenders undercapitalized enough to destabilize the financial system in the eurozone.

      We’re really dealing with the unresolved issues from the 2007-08 crisis that were never fully resolved. Greece is too big to fail. And as we saw in 2008, worries about counterparty risk can quickly dry up liquidity.

      • janis

        Is there anything that deserves to fail? If they continue to insist on having so much of their money plowed into pension funds and other benefits for state workers, then why shouldn’t they fail? Why should everyone else have to prop them up if they refuse to make concessions?

        • Francis Cianfrocca

          There’s no easy answer to your questions. And there are no hard answers that don’t demand a lot of sacrifice from the good guys.

        • texasgalt

          because the market makers and money changers might lose money. The unwashed might take it to the streets. So risk is laid off on the productive taxpayers. Think of it as a way to raise taxes . . . and the looters can look you in the eye and say: “What else could we do?”

          What else we could do is turn our backs on the Euro-flakes and try to remember that markets should function without all the social engineering.

          • Richard Mullins

            and it seems that a lot of questions on the Greece problem are about. It doesn’t look good for France and Germany but not much to worry here. I’m very worried about the Chinese meltdown and I’ll look for a link as well as make a diary on it. Let’s just say it’s not good news.

      • dt

        Francis,

        I assume that if Eurozone destabliziation starts to occur it won’t take long for U.S. counterparties to feel the effects here? Unless, that is, there is far less lending across the pond than I assume. Any predictions on how long this process would take to play out if it came to it? Hours? Days? A week?

        Thanks.

        • Francis Cianfrocca

          If a crunch comes, the ECB will be able to keep everyone liquid enough to avoid major trouble.

          If this spreads beyond Greece, then we have problems. The answer to your question is probably months.

          I want to stress, no one is reporting liquidity problems in the US. Quite the contrary, all the world’s flight capital is coming here.

        • Common_Cents

          We pledge 17% of the IMF’s funds. We will be indirectly bailing out several countries with little hope of being paid back. I suspect we’ll be hearing more and more about the IMF.

          • Richard Mullins

            that being, Greece,Spain ,Portugal and Italy. It looks like Greece is the tip of the iceberg and more problems will be seen later. It doesn’t look all that good and riots in Greece is one bad of it.

      • Spartan4Life

        Why are we not seeing more press accounts of Greece as a cautionary tale for the the rest of the world’s “democrat socialist” economies? I am talking about Spain, Portugal, France, Great Britain, China, California, Illinois, New Jersey, Pennsylvania, and Washington DC.

        The fact is that every government job is a zero sum game. Since governments have no way of creating “revenue”, they can only tax, borrow, and print, all of which are bad. The only way we can succeed as a global economy is to have the absolute minimum government workers and not a single one more. There is no money folks!

        Our whole world will sink to ruin if we don’t wean the Greeks, Illini, Californians, English, Teachers, SEIU, Venezuelans, etc. off the government teat.

        If you work for the government you need to take a long hard look in the mirror because the rest of us are paying for you and if your value add is marginal we ought to be firing you right now. You work for us and, quite frankly, a couple of times I have been at the DMV the value equation hasn’t exactly closed.

        We need to cut the number of government freeloaders at every level. The sooner the better because it will only get worse.

        Where is the leadership?

        • http://www.examiner.com/x-1597-Charlotte-Law--Politics-Examiner Mike gamecock DeVine

          discredits liberalism. Their liberal policies are NEVER blamed for anything.

          btw, ever hear of Spartanburg?

        • texasgalt

          As for leadership, that is up to the producers, who must face down the looters at the ballot box . . . and then stand against their violent assault when it comes after November.

          We’re up for that. Right?

  • duke90

    that Greeks have slightly darker skin than The Man in northern Europe and we won’t have to send him. He’ll go on his own to whore himself before every possible camera fight injustice.

  • Adjoran

    It’s like living in the penthouse apartment of a high-rise building when fire breaks out 10 floors below. Do we say, “Well, it isn’t on OUR floor, so why worry?”

    Good way to get burned.

    Unfortunately the Greeks have engaged in decadent self-indulgence for so long they riot at the thought of any small inconvenience, let alone the real suffering that will be necessary to set their house in order. I hope the IMF package is tailored as was their practice with insolvent regimes – make the austerity measures be adopted and put in place FIRST before any bailout checks are sent.

    • justfedup

      There is going to be alot pain on our journey out of this mess & experience is the best teacher. We need to quit rewarding bad behaviour by baling out irresponsibility, otherwise how can you stop it. What lesson will be learned? The school of hard knocks is infinitely better than anything coming out of the UN, the IMF, the FED or Harvard. Libs always look for someone else to clean up & pay for their mess.

  • janis

    One of the headlines in red on Drudge right now says, “White House Doesn’t Rule out Sabotage in Market Fluctuation”. Ah gee whiz, what goes around, comes around.

    It’s how Obama got elected after all, the market fluctuation in Sept. 2008. Wouldn’t it be some lovely short term karma if it’s also how he loses Congress this time?

    • Francis Cianfrocca

      Sabotage. What will he think of next?

      Anyway, I’m fully expecting a Congressional inquiry into the market-structure issues that led to yesterday’s mini-panic. It was an exceptionally rare event, and there are reasons to think that some quite recent changes were involved.

      There wasn’t any sabotage, and there probably weren’t any fat-finger errors either.

      • SteveLA

        F_C

        For those us old enough to remember the days of 19 percent house loans and all the other Jimmy Carter late 70′s pain, when do you think the same sort of thing will occur again?

        I’m looking at what that eventually will do to my retirement plans and funds, and do expect it to happen again with all this spending going on now, how can it not?

        I’m not sure what the trigger will be to start up the way back machine and take us back to the days of Hyperinflation, but there probably will be one, related mostly to another oil shortage. I just can’t wait for Jimmy Obama to appear in a sweater and announce the national 45 MPH speed limit.

        • Francis Cianfrocca

          Every econ textbook will tell you that if you print too much money, you get inflation. And everyone who makes a living selling gold is pressing the case that the end of this process is hyperinflation.

          We won’t get inflation or hyperinflation unless we have too much demand relative to economic output. Inflation isn’t too much money. It’s too much money chasing too few goods.

          Why is the 30-year bond currently yielding in the 4.20s if the environment is inflationary? Why for that matter did the 10-year note yield not rise along with short-term rates five and six years back?

          Reality can change, and quickly. But current reality is not inflationary.

          • Ausonius

            on the rise of America’s national debt to GDP approaching parity? Reports place it now at 93%.

            Will that not be a trigger for inflation/hyperinflation, or is bankruptcy and loss of credit standing more likely?

            Or could both happen?

            Screaming for more taxes of course will be the Dems response to solve any crisis they have fomented.

          • SteveLA

            F_C

            I thought the classic spending that we are doing now will lead to to the spiral of increasing interest rates, decreasing industrial spending, decreasing credit, more unemployment…etc. etc.

            As I recall the mid 70′s this was the pattern that led to Jimmy’s Stagflation and interest rates up in the high teens. First house I ever bought had an interest rate of 12 percent or something ghastly like that I thought I was doing great to get that.

            Maybe I’m using the wrong terms, I do defer to you on all this “stuff”, but I am predicting run away interest rates and something like “Stagflation” hitting somewhere in the 3 to 6 year time frame from now because of all the spending going on right now. I’d appreciate reading your views of what the future looks like.

      • henryrearden

        oil rig sabotage? Makes for a couple of handy little crises for 0bama & Co. to make use of, ya think?

  • redneck_hippie

    I’m wondering at what point will the worst case scenario of default be priced into the market. The best case scenario would seem to have had the upper hand for awhile.

  • kowalski

    I still don’t understand why anyone is trying to “save” Greece. It’s a fundamentally corrupt nation and in this instance I really have to have sympathy for the German people who are footing the bill for their “survival”.

    Nothing is going to change Greece except abject failure and the EU shouldn’t be spending the money: they’re throwing it down an absolutely bottomless rathole.

    None of the Papas or the Takis or the -osopouleses in Greece ever have the slightest intention of paying taxes — they already don’t here in the United States. The wealthy don’t pay taxes and are completely corrupt and the rabble throw molotov cocktails in the streets. It’s not a nation, it’s the Gong Show.

    Europe should let them go and save and invest their money. That’s my opinion.

    • kowalski

      And frankly all the European governments should allow it to go that way and then look at it as a stark result of the longstanding governmental policies the Greeks (particularly the wealthy ones) have forced Greece into.

      I have absolutely no sympathy for Greece. It became this way because of many of the same people who are multimillionaires in this country as a result of Onassis changing minority contracting laws in the late 1960s. They’re all a bunch of thieves, Francis. The Washington DC Metro was built by people who are “minorities”. I’ll leave it to you to tell me who they were.

      • kowalski

        I know personally the firm that supplied a lot of the structural steel for the Washington DC metro, because that person’s company was owned by my Greek uncle. We don’t to this day know how he bought the company, because he never graduated from college.

        He was, however, eligible to contract for it because Onassis made him a Minority.

        Must be nice.

        • kowalski

          But he’s the whitest guy I’ve ever seen. This is the Piaggio Jet guy, the one with the wife with the 10 karat diamond ring.

          All horseshit from the git-go, and all thanks to the contracting laws designating Greeks as a “minority contractor” here in the USA.

          Wake up, folks.

          • saltlick

            Are you related to Alexander Graham Kowalski?

            He was the first telephone Pole.

            (Sorry, the prospect of watching my life savings halved by hyperflation has me giddy.)

          • kowalski

            But no, I’m not related to that guy. I am related by marriage to the other guy, and frankly a lot of the time, I wish I wasn’t.

            It isn’t as though it has ever done me any good in the first place.

            And I still don’t have much sympathy for the Greeks: the rich Greeks are sitting back and letting the EU bail out their failed State, which they helped to create over the past 40 years, because they can’t stop crossing the streams.

          • kowalski

            So between the Rich Greeks, the Poor Greeks and the Commies, plus the people I refer to as “Takeopouloses” who I am I supposed to get behind, here?

            No pun intended.

          • kowalski

            But it’s no way to run a Nation State over the long term.

  • kowalski

    The Day I have to worry about my retirement because of the way the Greeks behave is the day I’ve decided the Greeks just don’t matter anymore, and I don’t care what happens to their entire country.

    After all, they didn’t care about ours. And that is the truth.

  • Alberta

    Greek banks wont lend to each other overnight anymore (per Kudlow) and all that.

    And the LIBOR may not have jumped up here, but all that means is it hasn’t jumped YET.

    I mean, FC, what is this ‘its all in Europe’ crap? Im pretty sure that American banks invested in Europe, and we all know it is a sin against god for the banks to lose money. The Euro banks lent a trillion dollars to Italy and Spain, and they are never seeing that money repaid. And our banks invested in the Euro banks.

    I understand you are a finance guy so you are biased, but FC, this ‘its too big to fail’ stuff, the bailouts and how we delt with 09, is what is aggravating the problems in 2010. Enough with it.

    And fat fingers and saboutage aren’t the story, the story is that the enitre marketplace looks like it is run by bafoons for bafoons. You have market glitches and the heads of the exchanges get on the TV and blame each other? All these people should be unemployed. Bailouts don’t get the idiots fired from the banks. Oh I know, the deadweight lost their jobs already. Whatever, I don’t buy it. If we had competence in the market place, you wouldn’t have glitches.

    American banks own European banks. Europe is toast. Ergo…

  • wingnut43

    that it has no proper Federal Government. It needs to federalize core functions of government like deposit insurance, defence, etc…, and pay for it with Federal taxes. And having thousands of really tough German-trained tax collectors siezing assets and locking up Greeks might be just what they need to get them to start paying taxes.

    But Europe is so far gone now that the only mechanism to save them is one borrowed from the old Roman Empire. The EU Parliament (yes they actually have one) needs to declare an emergency and appoint a Dictator to take control of Europe. They should call it the “Office of the Caesar”.

    • http://impudent.blognation.us/blog kyle8

      They could regain their sanity and end this silly attempt to nationalized several dozen completely different and distinct nations.

      It will never work the way they envisioned it, They are gong against history. Modern history since world war two has seen a movement for cultures to break away from the parent country and for large countries to decentralize.

      Besides, most of these countries never even put full integration up for a popular vote, and those who did, lost.