Wednesday, November 09, 2011

Euro Crisis Mismanagement

Italy and Greece are financially insolvent and their governments are in a real mess. Austerity programs are being forced on both countries, and their citizens are not very happy about the coming cuts.

The money was borrowed and spent. When you read the papers, there is a mention that if Greece and Italy were to default, it could take other countries with them. At this point, you have Germany and France stepping in to rescue their fallen comrades.

The real question not being asked, is who loaned all of the money for this drunken orgy? Germany and France come to mind, not to mention a few State retirement funds. What is happening here is the same as Jingle mail in the US. It’s a little like buying a million dollar home with no money down and you lose your job. A bank that does too many of these finds themselves out of business real quick.

The problems in Italy and Greece are rather obvious. Problems in France and Germany are nonexistent, if they can get Greece and Italy to make their "house payments." Here in the US, everyone thinks that the Government is trying to bail out the homeowner and that is just not the case, they want them to continue paying their outrageous mortgages, with minor modifications. This keeps the banks paper current and on the books as written with no markdowns.

The big players in Europe, France and Germany financed these unsecured loans. The European banking system faces ruin, if and when the PIIGS stop paying. To say that the banks lose in this case, is rather an understatement, it is their depositors that take the hit. The banks only loan your money, and if they lose it all, that’s life. Look for problems at Deutsche Bank and Societe Generale.

Everyone knows the PIIGS are broke and that is no big deal. What's not realized, is that the people in trouble, aren't the deadbeats, but rather the bank depositors that had funds to loan. The loans will not be repaid, but that is less than obvious with all of these proposed repayment plans.

Nobody is going to go to prison over this, being incredibility stupid or optimistic and running a bank, is not against the law. The question you need to ask is your money safe in a Euro bank? The answer; "Not Sure," could start a run on the Euro. Retirement could be further away than you envisioned.


dearieme said...

I'd like to think that the shareholders and bondholders take a hit before the depositors do. But since it'll largely be pension funds that own the shares and bonds, your conclusion stands.

dearieme said...

P.S. Is Italy really insolvent? I read that its government has unusually high assets. If it can bring itself to sell them, doesn't that mean it's facing illiquidity rather than insolvency?

Separately, of course, it's trying to make its living in a wildly unsuitable currency.

Jim in San Marcos said...

Hi Dearieme

What we are looking at in Italy as well as Greece and the US, is the interest that has to be paid on the national debt in relation to taxes coming in. At 7.25 Italy is toast. It's right at 6% now.

Here in the US, a 9 percent interest rate on 10 year Treasuries would be the end of the world for us.

Interest is normally an indicator of risk and inflation, the more risk and inflation, the higher the rates.

The US is a "special" "basket case." There is no risk with government bail outs everywhere. And of course, there is no inflation, food, health care and gas have just gotten "more expensive." wink wink

The Euro effectively prevents these small countries from devaluing their currencies to stimulate trade. What ends up getting devalued is the quality of their goods. Germany offers better quality at Italian prices.

What we are really looking at in Europe is the death struggle of the Euro.

frakrak said...

Jim it would appear that the Euro is toast, but thinking laterally, it could also inspire some of the sovereigns there to push for closer amalgamation. In the process get rid of the countries you don't want and have closer political and economic ties with those you want?
My big announcement was a little over-rated, we are getting upwards of 2500 marines here. China seems to think the U.S. is getting involved in their area of influence and is protesting to Australia about this. Obviously they are referring to their map of the United states of China:)
You have to admire the Chinese! Or else it would seem:)