European banks head into crisis 80 years after Credit Anstaldt bankruptcy
Posted on 10 May 2011 with 3 comments from readers
European banks are sleep walking into a crisis that could be every bit as serious for the global economy as the bankruptcy of the Credit Anstaldt bank in Austria 80 years ago tomorrow.
For while Wall Street has become becalmed in a sea of good profit results and cheap money, life on the other side of the Atlantic has been steadily getting worse for the banking community with a growing sovereign debt crisis.
S&P downgrade
Rating agency Standard & Poor’s reported an ‘increased risk that Greece will take steps to restructure’ its $160 billion bail-out package which would result in a ‘distressed exchange for bondholders, and slashed Greece’s credit rating from BB- to B.
Banks are alarmed that this instantly meant fresh provisions would have to be made against Greek debt. S&P warned that upto 50 per cent of Greek debt may have to be written off. But this problem is only going to get worse. Greece is simply not going to take the pain of its debts alone (click here).
Thus far the main banks lending to the so-called eurozone periphery countries have been shielded by the bailouts and austerity packages. This has effectively kept potential defaults off the agenda.
But the creditors are widely spread. Germany, France and the UK are owed $350 billion by the Portuguese, Irish, Greeks and Spanish treasuries. If they cannot pay up this is a systemic banking crisis.
There is unlikely to be a repeat of the fall of the Credit Anstaldt bank on May 11th 1931. Just as governments stepped in to rescue the biggest players in the global financial crisis of two years ago, they would be forced to act again.
Economic repercussions
But what will this mean for interest rates in Europe? They will all have to go up. Across the board the credit worthiness of European bonds would be lower. Think what that would mean for bank provisions.
Many more European banks would indeed be bankrupt and be forced into nationalization to stay in business. Then think what the credit squeeze this implies would mean: European business and commerce would not have the credit available that it needs to function, and that credit made available would come at a much higher cost.
It’s a recession or even depression scenario that nobody wants to take seriously. It’s the European version of the US subprime crisis – with bloated lending to bad debtors at its root – and that was also ignored until it became a disaster and precipated a global financial crisis.
Contagion, gold and silver
Given the way such contagion spreads around the world, other nations ought to be taking more interest in this crisis. In the 1930s the depression arrived in two stages: the 1929 Wall Street crash; and the 1931 failure of Credit Anstaldt. Is it going to be any different this time?
Those now selling gold and silver thinking that they will buy it again in the summer when prices are lower might yet be caught out by such a major and fundamental crisis. Chartists simply do not take such considerations into their predictions.
Indeed, gold and silver prices are up on the S&P downgrade which is unlikely to be the last this summer. A true eurozone crisis would rally gold, silver and the US dollar.
3 Comments posted by readers:
I am fascinated by the difference between your account here of the time between now and the summer and that of John Burbank. He says that “the summer will be the bottom for commodities in this correction”,
whereas you write: “those now selling gold and silver thinking that they will buy it again in the summer when prices are lower might yet be caught out…”
I definitely concur with your view rather than Burbank’s, whose account of his actions was rather stuttering and, perhaps, hesitant to my mind. Of course, he would have expressed himself better in writing, I’m sure, but his hesitancy might suggest that he simply couldn’t justify selling g and s now when commodity prices have fallen, as he believes, just temporarily, whilst saying simultaneously that the outlook for physical gold was good.
It would be interesting to hear what he says, if your view that g and s prices might rise before or in spite of the usual summer decline, turns out to be correct.
I agree with you that “it is a (European) recession or even depression scenario that no one wants to take seriously”. I would guess that they do take it seriously in the small hours of the night when they can’t get to sleep.
However, would it help if the politicians did actually start talking about depression just around the corner? As leaders in post by means of the electorate, panicking the people is an uncertain political path to go down. Even so, the mainstream media could talk about this developing scenario but ever since Ambrose Evans Pritchard has gone to the Mayans, it seems that the Daily Telegraph has no one else to take over the doomsday mantle.
Ed Note: Yes sadly Ambrose is on sabbatical, and nobody else has quite his experience or insight. When debt blows up it is not nice at all, and what we have is unprecedented in scale, although the South Sea Bubble is comparable or the Tulip Mania. Governments are trying to save all the people from their own folly when it will only be possible to bailout a minority. The wealth people experience in a credit bubble is a sad illusion of wealth because it all has to be paid back with interest or all their other assets are taken from them. But true this is an impossible sell for democratic politicians, hence inflation is used to cover up a recession/depression, and gold and silver rocket.
Many others have been and still are drawing parallels between
today and other crisis periods throughout history, all trying to
heed Santayana’s warning. We share in that effort.
Missing from the above posts is an element which seems to be
at the crux of events. The euro is 57% of the USDX and, as it
reacts to its own bond crises, the effects will be felt in ALL
commodities and currencies. USD linkage allows volatility to roll
all around the globe, affecting each and every market in turn.
That may take many months, imo, and it will be after this time
that the PMs will exhibit their lasting shine above the smoke and
ruin of former empires. Those empires will harken to the stability
offered by asset based money as opposed to debt based money.
Those of us who are already at that point in our own finances
will be so far in front of the sheeple that it may be dangerous.
As they say,
“Being one step ahead, you’re a genius; two steps, a nut.”
Note to John Mark – trying to set a politician straight is like
trying to teach a pig to sing. Not only will you not succeed,
but you will really annoy the pig, never mind all those nearby.
Denarius, I am not cynical of politicians!
In fact, I think that they are prudent not to panic the electorate, the people, by saying that a depression is just around the corner. Such a view of depression might be wrong, although I don’t think it is, and if it turns out to be wrong (that it’s close at hand), they will look foolish and will have torpedoed their career. Besides, what’s the point of panicking the people over what will inevitably occur?
To set a politician “straight” first requires that there is a sufficiency of agreement on what is straight or the best course to take. Such agreement is impossible to achieve amongst human beings, and this is why we have a system of going with the majority or going along with the decisions made by those, who have been elected by the majority.
Without politicians, we would have anarchy, which is far, far worse than the all-too-human politicians, though not pigs, making their mistakes within a reasonably regulated system of oversight.
I thought that the Editor dealt with the matter well so that I am puzzled that you think he has left out “an element that seems to be at the crux of events”.
You yourself seem to put PMs into their own unique commodity bracket, so that, whilst you may be right about commodities being generally affected, s and g are also “asset based money” which people will get into even when other commodities are having problems.