NationStates Jolt Archive

A variety of commentary and facts:

http://www.spiegel.de/international/business/0,1518,582072,00.html
Europe Bids Adieu to Common Financial Crisis Approach

The idea of an EU rescue fund to address financial crisis symptoms in Europe is off the table. A summit meeting on Saturday of Europe's largest economies may end up being little more than a sharing of national strategies.

Europe Looks for a Financial Crisis Plan (http://www.spiegel.de/international/business/0,1518,581918,00.html)
Knowing When to Reach for the Fire Extinguisher (http://www.spiegel.de/international/business/0,1518,581931,00.html)
IMF Urges Europe to Develop Credit Crisis Strategy (http://www.spiegel.de/international/business/0,1518,581646,00.html)
Lessons from a crisis (http://www.economist.com/world/europe/displaystory.cfm?story_id=12342091)
Struggling to keep moving (http://www.economist.com/world/europe/displaystory.cfm?story_id=12304737)
Another top European bank falters (http://news.bbc.co.uk/2/hi/europe/7653133.stm)
No banks bail-out fund for Europe (http://news.bbc.co.uk/2/hi/europe/7648249.stm)
Eurozone services signal slowdown (http://news.bbc.co.uk/2/hi/business/7650452.stm)
Iceland's financial freeze (http://news.bbc.co.uk/2/hi/business/7651313.stm)
French minister knocks Irish move (http://news.bbc.co.uk/2/hi/business/7648027.stm)
Recession 'real risk' for France (http://news.bbc.co.uk/2/hi/business/7650231.stm)
Central banks become lender of only resort (http://www.ft.com/cms/s/0/babe57a0-9137-11dd-b5cd-0000779fd18c.html)

One aspect of all this that interests me in particular are the regulatory issues. It's been argued that American deregulation contributed to the crisis appearing, and from that some European politicians have started tirades touting the superiority of their own "social model" to US capitalism. Meanwhile, any actual regulations they may have supported in theory don't actually exist. European banks are just as badly overstretched as American ones, and while they've got less exposure to rapidly falling real estate prices (with exceptions), their provisions for dealing with the counterparty risk in particular have been woeful. This notably includes a bunch of state-owned banks in Germany (Sachsen LB (http://www.spiegel.de/international/business/0,1518,523170,00.html), IKB (http://en.wikipedia.org/wiki/IKB_Deutsche_Industriebank) and West LB (http://www.aol.com.au/news/story/EU-regulators-probe-German-rescue-of-WestLB-bank/1065651/index.html)), once again making the point that the nationalisation or state-control doesn't prevent stuff like this.

Any attempts to actually go forward in realising this fictional European social model of finance have ended with each country going its own way. Those with the cash and confidence, like Ireland, have gone all-out. Germany has used taxpayer funds freely to bail out banks, raising concerns from the EU which wasn't asked in the matter. Sarkozy wanted to be seen as a heroic crisis manager, but is largely being ignored. And the UK...well you know the deal.

So what is the European social model for finance? What does all this mean for the EU? Do European lawmakers really have any base for ranting against American lawmakers on this?

No basis for ranting. Regulatory arbitrage. So they can go fuck themselves.

Bottom line, we're in the shit. Europe is in even deeper shit. This is nothing to do with mortgages at this point.

PAX AMERICANA!!! One day closer to us colonizing you! PAX AMERICANA!!! ;)

No basis for ranting. Regulatory arbitrage. So they can go fuck themselves.

Bottom line, we're in the shit. Europe is in even deeper shit. This is nothing to do with mortgages at this point.

genuine question: why is Europe 'in even deeper shit'? (summary... no time to read big articles today)

that's not the message we're getting over here

that's not the message we're getting over here
Well, Britain is very dependent on the finance industry. Its housing market is also in for a battering, which will combine with the credit rationing from its banks.

Germany might avoid the worst, because a lot of businesses aren't as dependent on the finance industry. They tend to use a lot of reinvested profits for expansion. But if the export markets suffer, Germany does too, since domestic consumers there are a sensitive, emotional bunch.

France was heading for recession simply because of higher oil- and commodity prices, even before the credit crunch has had a chance of filtering through. It's also got a systemic inflation problem - lots of regulations and peculiar consumers have somehow allowed French inflation to be higher than that in other euro countries. In Germany the unions have also started to ask for more wages, so all in all the ECB has little room to aggressively cut rates either.

Spain and Ireland have some time trying to work their way through a burst housing- and construction bubble, into which this crunch fits nicely. Italy is never getting off the ground, even though its banks were too primitive to get hurt a lot in the crisis.

And the worst part about all this is that continental European countries have such a bad time dealing with recessions. In the US they happen reasonably regularly, and people lose their jobs and do it tough for a while, but then things recover and people get hired again. It's all very flexible, both because there aren't as many intrusive labour regulations and because of cultural factors (ie the whole approach to employment). Recessions in Europe start with a big shock with lots of unemployed people, but those don't get proper jobs back for many years, often never. It takes European unemployment much, much longer to get back to "normal" levels after recessions - and those normal levels are quite high at above 6% anyways (which is what the US might expect in a recession, not in the middle of the cycle).

When the politicians say Europe isn't looking too bad, their talking crap. The good news in recent years were driven by real estate booms in the UK, Ireland and Spain, and by Germany picking up again, which was largely export driven. Now those factors are gone or hurting, and you get credit rationing on top of that. By en large, continental European governments haven't used the good times to drive reforms forward aggressively, so any pain will take ages to go away.

Another one:

http://www.businessspectator.com.au/bs.nsf/Article/Is-it-time-to-rescue-Europe-K5RL4?OpenDocument&src=sph
Can Europe be saved?
ft.com

This has been a week of self-congratulation in Europe. We have saved a handful of banks. We have, in effect, started to cut interest rates. We even had a summit of European leaders that produced warm words of solidarity. It looks as though the Europeans have reached substantive agreement that no systemically important bank should ever be allowed to fail. European officials believe that it was a big mistake to let Lehman Brothers fail. It could not have happened here. The rescue of Fortis and Dexia last week, two large, but not too large, cross-border European banks, should be seen as a sign that our emergency procedures are working. Look, they say, we met quickly and decided what needed to be decided. It was fast and unbureaucratic. We do not need a European rescue fund, let alone any new institutional set-up to deal with this, they say. We can do it ourselves.

And one more. Last chance for people to post...

http://www.businessspectator.com.au/bs.nsf/Article/Blame-it-on-Europe-K6RKV?OpenDocument&src=sph
Blame it on Europe

The sudden and dramatic escalation of bank problems in Europe has overwhelmed any positive reaction to the passing of the $US700 billion bailout billion and led directly to last night’s return of the Dow Jones to below 10,000.

There are two reasons for that...

And so, the Second Great Depression begins...

Because the issue is not about Sub prime mortgages. Or deregulation.
The interest rate is too low and has been for too long.
Low interest rate = less people saving money because the gain is not worth it.
Low interest rate = more people getting loans and getting them for larger amounts.

People fail on loans this is a fact of life. However, when the banks have limited assets and capitol people people keep withdrawing their funds to buy shit because they don't gain a dang thing keeping it in the bank. and they already have a ton of money loaned out, it does not take very many defaults to send a bank into a liquidity crisis.

The reason people are targeting deregulation, or the greater housing access movement is they want someone to blame. For the love of God lets stop blaming people and raise the damn interest rate to fix this shit.

Meanwhile, Iceland seems likely to be the first government casualty here. The scenario is simply that the numbers handled by its banks are too big for any bail-out capacity of the government.

http://www.economist.com/world/europe/displayStory.cfm?story_id=12370596&source=features_box_main
While governments on mainland Europe were trying to save their banks, Iceland was trying to save the country after it had overextended itself trying to bail-out its banking system. Its economy had been doing well, but its banks had expanded rapidly abroad, amassing foreign liabilities some ten times larger than the country’s economy, many funded in fickle money markets. Since the country nationalised Glitnir, its third-largest bank, last week the whole Icelandic economy has come under threat. Its currency is tumbling and the cost of insuring its national debt against default is soaring. As of Monday it was desperately calling for help from other central banks and was considering radical actions including using the foreign assets of pension funds to bolster the central bank’s reserves. These stand at a meagre €4 billion or so, according to Fitch, a rating agency, and in effect are now pledged to back more than a €100 billion in foreign liabilities owed by its banks.

As a result:
Icelandic government battles to save the economy (http://www.guardian.co.uk/business/2008/oct/06/creditcrunch.marketturmoil4)
Iceland's Credit Ratings Lowered by S&P After Bank Guarantees (http://www.bloomberg.com/apps/news?pid=newsarchive&sid=a.ZZmJXJw874)
Iceland's Krona Drops as Traders Doubt Government Plan Enough (http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aOBi6wo3m7Tk)
Iceland: When Too Big To Fail Becomes Too Big To Rescue (http://www.portfolio.com/views/blogs/market-movers/2008/10/03/iceland-when-too-big-to-fail-becomes-too-big-to-rescue)

The same scenario is possible in other countries as well, by the way. Wherever there are large international banks operating out of small countries, there is this risk.

Oh wise Neu, tell me the situation in Switzerland.

Amen.

Oh wise Neu, tell me the situation in Switzerland.

Amen.
Yes, my child.

Anyways, the two big banks, UBS and Credit Suisse have so far taken subprime-related hits, but were more able to stand up to them because of their other, more traditional overseas businesses. UBS in particular has responded by cutting staff like crazy and getting out of everything exotic. I don't know much about what Credit Suisse is doing right now.

If they can muddle through as they are now, taking the occasional loss and big write-down but staying afloat, Switzerland should be fine. The place always has a lot of deposits that are supposed to be quite safe, so for credit rationing to start there things would have to be very severe indeed. If the big two start seriously wobbling though, the Swiss government's budget is dwarfed by the debts involved so they'd be stuffed.

Well, it's reassuring to know that my nazi gold is safe.

Meanwhile, Iceland seems likely to be the first government casualty here. The scenario is simply that the numbers handled by its banks are too big for any bail-out capacity of the government.

http://www.economist.com/world/europe/displayStory.cfm?story_id=12370596&source=features_box_main


As a result:
Icelandic government battles to save the economy (http://www.guardian.co.uk/business/2008/oct/06/creditcrunch.marketturmoil4)
Iceland's Credit Ratings Lowered by S&P After Bank Guarantees (http://www.bloomberg.com/apps/news?pid=newsarchive&sid=a.ZZmJXJw874)
Iceland's Krona Drops as Traders Doubt Government Plan Enough (http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aOBi6wo3m7Tk)
Iceland: When Too Big To Fail Becomes Too Big To Rescue (http://www.portfolio.com/views/blogs/market-movers/2008/10/03/iceland-when-too-big-to-fail-becomes-too-big-to-rescue)

The same scenario is possible in other countries as well, by the way. Wherever there are large international banks operating out of small countries, there is this risk.

About Iceland. Seems the government just put the entire island up on Ebay.

And following shortly on the heels of Iceland is Pakistan (http://www.telegraph.co.uk/finance/financetopics/financialcrisis/3147266/Pakistan-facing-bankruptcy.html)

And following shortly on the heels of Iceland is Pakistan (http://www.telegraph.co.uk/finance/financetopics/financialcrisis/3147266/Pakistan-facing-bankruptcy.html)

don't worry China is buying everyone out.

don't worry China is buying everyone out.

Free Market capitalism applied to countries!

I Like it :p

In the long run? Not much is going to change. We're not going to become the next Soviet Union or the first libertarian thought experiment.

Free Market capitalism applied to countries!

I Like it :p

you all better start learning Chinese. the Chinese Communist Party now controls all our governments.

Are the Europeans' problems compounded by there being too much money in the system?

Are the Europeans' problems compounded by there being too much money in the system?
Not really. The problem is essentially the same as the American one - banks falling to pieces, so they're holding on to all the cash and companies and individuals don't get to borrow anymore. Companies in particular have to though, both to do new investment and to keep existing debt rolling over. If they can't, they go bust.

http://www.businessspectator.com.au/bs.nsf/Article/Woe-is-Europe-K7SAT?OpenDocument&src=sph
[...]

Woe is Europe. A few days later European leaders gathered at a mini-summit to try to come up with a co-ordinated response to the crisis and ended up in disarray, with the rich countries refusing to do anything that might bail out the increasingly poor ones like Iceland and Greece, only highlighting the fact that no one is in charge.

“Who is Mr Europe? What is his telephone number?” asked currency strategist with BNP Paribas, Hans Redeker. “There is no such thing. We have a cancer eating at the system because even healthy companies cannot roll over their debts, yet the politicians still don’t understand the risk.”

Say what you like about the leadership in the United States, at least they have some. The US Treasury will soon be buying mortgage securities, and although there was an initial wobble on Congress on the matter, there is no question that Treasury Secretary Hank Paulson and Fed chairman Ben Bernanke are in charge and that they at least have a plan.

[...]

One thing Jean-Claude Trichet does well is explain fully what he’s doing: he always has a press conference after an interest rate decision.

Last week’s contained this gem: “I tell households, our fellow citizens in Europe, that they can trust us to deliver price stability. They can count on us, and we are fully conscious of the fact that it is their main concern today.”

Er, actually JCT, I don’t think price stability is their main concern today. I reckon their main concern is their jobs and their savings. Just putting it out there.

[...]

And the worst thing is that Europe doesn't bounce back from recessions like the US does. Labour markets just tend to move to a new permanent equilibrium for some reason with unemployment higher than it was.

Not really. The problem is essentially the same as the American one - banks falling to pieces, so they're holding on to all the cash and companies and individuals don't get to borrow anymore. Companies in particular have to though, both to do new investment and to keep existing debt rolling over. If they can't, they go bust.True, but what worsened the U.S. crisis was that there was so much money in the economy for banks to lend out, due to the Fed authorizing more money to be released. This is one reason Treasury Bonds are suggested by the 'market solution'ers as part of a way out of the crisis.

And the worst thing is that Europe doesn't bounce back from recessions like the US does. Labour markets just tend to move to a new permanent equilibrium for some reason with unemployment higher than it was.This does seem to be true.

True, but what worsened the U.S. crisis was that there was so much money in the economy for banks to lend out, due to the Fed authorizing more money to be released. This is one reason Treasury Bonds are suggested by the 'market solution'ers as part of a way out of the crisis.
Oh, the initial cause there was the same as in the US, I thought you were talking about right now. It's not like the Fed was the only central bank with low rates, or the only cause for a lot of money seeking returns. Solid economic growth, money from oil producers and China seeking investments, high personal debt in some countries (it's greater in the UK than in the US) and so on. And of course with money being able to flow across borders and currencies, it doesn't really matter whether the Fed injects the cash or the ECB.

genuine question: why is Europe 'in even deeper shit'? (summary... no time to read big articles today)

that's not the message we're getting over here

A lot of European banks have fictitious capital. They are relying upon default swaps from the US to 'shore' up their capital position. And their leverage ratios are even higher than the worst US offenders.

The US is big enough to bail out (maybe) its banking system. Many European banks have more debt exposure than the GDP of their domicile country, so bail out is impossible.

Euro assets have only just begun to go stinky. And look at the chaos already.

The Euro as a currency might not survive the crisis, because the germans don't want to bail out the italians. (Plus the PIGS). This will cause epic chaos.

So I'd say that's deeper shit that the US. By quite a bit.

Not that it is going to be a barrel of monkeys over here.

Oh, and prize for the most fucked industrial economy: Denmark.

Ireland is going bank to 1995.