Wednesday, six of the world’s largest central banks, led by the Fed, averted a meltdown of the Eurozone’s banking system by agreeing to print more money. One has to wonder: if solving such dire financial crises is as easy as creating still more fiat money, how did some of Europe’s major banks get in financial trouble in the first place?
The banks got in trouble primarily by buying the bonds of weak members of the Eurozone. The banks relied more on the borrowers being sovereign states than their creditworthiness.
Just how bad is the financial crisis in the eurozone? Consider the following:
According to the Financial Times, so far this year European banks have been able to sell only two-thirds of the bonds needed to refinance (rollover) existing debt. They were able to sell only $413 billion of $654 billion needed.
Compounding problems for European banks are the impending Basel III reforms, which will impose tough liquidity and capital requirements on banks. To comply, Morgan Stanley estimates that European banks will have to dispose of as much as $3.3 billion worth of assets over the next few years. No one seems to know who will be the buyers. The European Central Bank that so far has not been a buyer of eurozone toxic waste.
Japanese troubled investment bank Nomura cut its exposure to European sovereign debt by 75 per cent in the past two months, from $3.55 billion to $884 billion. Nomura slashed its exposure to Italy by 84 percent, from $2.8 billion to $467 million. The credit rating agency Moody’s recently put the bank on notice that its rating could be lowered to one notch above junk, which shows that flames of this financial contagion are not restricted to Europe. And, they are reaching the United States.
According to the Institute of International Finance, US financial institutions have $767 billion worth of exposure through bonds, credit derivatives and other guarantees to private and public sector borrowers in the eurozone’s weakest economies.
When the PIIGS (Portugal, Ireland, Italy, Greece, and Spain) acronym appeared on the scene, France and Germany were the stable members of the European Union and seemed likely to be the EU’s saviors. Now, France’s financial integrity is in question as the interest rates the market has put on French bonds are at levels seen only a few months ago for the weaker eurozone members.
If that’s not bad enough, November 23 witnessed one of the least successful German debt sales since the launch of the single currency. Six billion euros in 10-year bonds were priced at 2 percent, but commercial banks bought only 61 percent of the issue, which meant that the Bundesbank (Germany’s central bank) had to pick up 39 percent (3.644 billion) of the issue. An analyst at Monument Securities in London called it “a complete and utter disaster.”
If the “euro experiment” fails, in the short run the US dollar will gain. However, Europe is the US’s major trading partner, and in the long run a weaken European economy would be disastrous for the US economy. And, don’t forget the $767 billion worth of exposure that US financial institutions have to borrowers in the Eurozone’s weakest economies. If Europe suffers a depression because of problems in the eurozone or the euro fails utterly, the negative impact on the US economy will be huge.
Now, though, the world’s central banks are cranking up their printing presses, and fiat currencies will flow in abundance. Mainstream investors seem to agree that more fiat money is the answer. The day of the announcement, the Dow Jones Industrials tacked on 490 points, the Industrials best one-day gain in 2-1/2 years, and the German DAX leaped five percent. Logically, the prices of US banks stocks roared higher. Not much talked about was that the price of gold climbed double digits in many markets.
The mainstream investment world readily accepts that “just one more papering” will give the troubled members of the eurozone time to get their houses in order. “We’ll see,” said the Zen Master.
Indeed, this is just a “papering over” of the problems because the real problems are systemic in Europe. The Europeans are far down the road to total socialism. There is a belief, held by too many Europeans, that the government is there to take care of them. Those people have failed to recognize that it has been they who have been taking care of the governments, their agencies and all the bureaucrats. For the eurozone’s problems to be solved, there will have a cultural change, a repudiation of a lifestyle engrained there.
The central banks may have averted an impending meltdown, but the move didn’t solve the problems facing the eurozone, which is that Europeans have wholeheartedly embraced socialism. Changing that attitude will be much more difficult than convincing six central banks to print more money.
