Europe gets a credit contraction without a formal banking crisis, what next for investors?
Posted on 27 October 2011 with 8 comments from readers
When is a crisis not a crisis but has the same effect? Answer: when EU leaders decide on how to handle their banking crisis.
The deal emerging from the conference chambers of Brussels late last night is for a major credit contraction over the next eight months to recapitalize European banks, a controlled default by Greece with a 50 per cent haircut and a leveraged $1.4 billion back-stop fund to ensure this can be done without bringing down the whole banking system in the process. The CDS implosion nightmare is not going to happen.
Positive or negative?
Is this progress? Well the avoidance of a disorderly systemic banking crisis is of course positive. However, this deal is already priced into financial markets that were actually hoping for somthing slightly better: a bigger fund and more public support for the banks.
What emerges guarantees a recession in Europe. The banks will have to pull in credit lines and recapitalize their shrinking balance sheets. So there is a credit contraction in the key eurozone nations without a formal banking crisis that would have been much worse.
Has Europe avoided its Lehman moment or just kicked the can down the road? For that we are still reliant on the unreliable southern eurozone countries taking serious action to reign in debt and deliver on austerity.
To date there is nothing to suggest that this will be forthcoming, quite the reverse. Every target set is missed, either through accident or in most cases deliberate malfaisance.
So good money is being thrown after bad again. The debt problem will get bigger and bigger until it blows the system apart.
Dangerous optimism
That is the pessimistic view, though arguably the only realistic view too. Investors who take an optimistic view of markets are always trumped in the end by the realists, so how should the intelligent investor position their portfolio now?
The ArabianMoney newsletter (subscribe here) has some strong arguments to make in the next issue for precious metals and Oil State equities. We see this very much as a repeat of the 1970s and an era of stagflation, that is low growth and high monetary inflation, and oil and gold were the winners then.
Real assets are also always good things to own in a systemic banking and monetary crisis of the kind that we still think must occur when the can is finally kicked to the end of the road. Read the next issue of ArabianMoney to get the full story.
8 Comments posted by readers:
What next for investors? If this fails and the euro fails, investors will be able to look forward to World War III – along with everyone else.
we realize that’s 1.4 TRI-llion$ Peter, and other than that, your article could not be closer to the truth.
they kicked the can UP the cliff this time…..look out below in ‘12 when it starts rolling(falling) back down.
A possibility the banks don’t take the voluntary haircut?…..triggering the CDS’s?
After typing a nice thoughtful comment, I’m getting an ‘Internet server error’ message a lot on this web site when I hit post. It is the only place where it happens. And I visit hundreds of sites. Someone should invest some money on Internet infrastructure over there. I would point out that easy wealth sometimes breeds complacency, but I won’t.
In the US they call these balance transfers on credit cards lol.. You move debt that is near or over its limit from one credit card to the new one with a higher credit limit and lower interest. The government of course has endless amounts of these credit cards in the US and Europe. China is backing Europe with funds too. Kind of odd as to why they didn’t mention Saudi,Kuwait or Qatar for this lol..
bill——that happens when u forget to put inyour name n email add……i do it TOO
@ boatman
Thanks boatman. You could be right because I was under the influence of some schedule 3 painkillers for a strange back injury. That can cause you to make simple errors, although I usually look over my comments quite carefully.
Something near here could have malfunctioned, or the NSA bugging equipment may have malfunctioned. (I sent quite a few comments to the Tehran Times, so who knows?) Since I got this AT&T high speed service it has mysteriously gone out twice. They seemed to be having trouble finding the source of the malfunction. They even sent a specialist to my house to check the wires inside the building, even though I told them there were multiple outlets, and all of them were down. The guy pulled sockets out of the wall and attached a strange computer to the line. After about 15 minutes, he said there was no problem in the house. They finally got it fixed the next day. All that computerized equipment and they take days to locate a problem which is obviously not a cut wire?
Saint Tammany Parish is attempting to construct a roundabout about a half mile away at Brownswitch and Robert Roads. I shutter to think what will happen when they crank up the backhoes and start digging. Thank goodness, the electricity is above ground. The phone lines, I’m not so sure. Hopefully, this project will be a greater success than the improvements they just finished at Brownswitch and Military Roads. They built a couple of short turning lanes, which they closed with those rubber cones after about a week of use. Every time I pass that way, I think of China, and thank God for the Pacific Ocean. Fortunately, McDonalds is only a mile in the other direction from here. And if another Katrina hits, the school across the street is an evacuation shelter ! I’m thinking the oak trees in the front of it will have grown from 2, to 3 feet in diameter before the roundabout is dedicated, no doubt with great government fanfair.
@bill……..no alcohol with those pain meds….liver n kidneys do not like that mix at alll….got 2 friends with transplants from it n believe me they are FAR from normal……
and being a meteorologist, i can promise u the chances of another katrina hitting within 100 miles of where it did in your lifetime approach ‘lottery odds’ (lottery-a tax on the mathmatically challenged- but i will buy ONE ticket)
@andy….china will back euro in ‘token’ numbers only
china starts:
http://globaleconomicanalysis.blogspot.com/2011/10/shanghai-homeowners-smash-showroom-in.html?utm_source=feedburner&utm_medium=email&utm_campaign=Feed%3A+MishsGlobalEconomicTrendAnalysis+%28Mish%27s+Global+Economic+Trend+Analysis%29