It will take more than the full Monti cabinet to end the eurozone crisis
Posted on 14 November 2011 with 2 comments from readers
By the end of the week the full government of new Italian prime minister Mario Monti should be in place and Greece is also under new administration. But that makes absolutely no difference to the numbers.
Greece is insolvent, a bankrupt nation in need of 50 per cent debt relief and arguably much more. Italy is heading for a liquidity crisis with its bond yields hitting 6.3 per cent, so much for the honeymoon period for new governments.
Banking crisis
Europe is marching into a banking crisis because its banks are too thinly capitalized and its governments are too highly indebted to bail them all out. The only answer is for the European Central Bank to become the lender of last resort and buy up the debt nobody wants and issue eurobonds to pay for it.
However, this sort of profligate lending and money printing is completely anathema to the Germans and they are the ones with the money as Europe’s creditor nation running a large trade surplus.
Eventually something has to give. But doubling up on austerity in Greece and Italy with new prime ministers is not the way forward. More austerity means less GDP growth and inevitably deeper recessions and less money to meet debts.
That is terminal for Greece and also extremely serious for Italy which has a liquidity problem with $400 billion in debts to roll-over and interest rates moving higher by the day.
Defaults in either or both eurozone nations impact immediately on bank balance sheets and the debts are widely held across the European Union. And these banks have balance sheets so stretched that these bad loans would make them insolvent.
Insolvent nations
Then the banks would need to go back to their governments for a bailout but if these governments can no longer borrow at reasonable cost then how can they save the banks?
It is this sort of conundrum that has some financial advisers telling their clients to stay well clear of Europe and to park money in dollars, treasuries or precious metals, or for that matter high-yielding US stocks, although the contagion risk for equities is obvious enough.
Besides the contagion from the eurozone banking system risks triggering a 2008-style implosion stateside too. Nothing much has changed over the past week, indeed things are just continuing to get worse.
2 Comments posted by readers:
In 1789, when the French people were being terribly impoverished by inflation and the franc was so debased, the government, in the form of the royals, did the full Monti with their heads.
I am not naive enough to believe that the bloodiness of the French revolution could not return to Europe and elsewhere. After all, the Depression of the 30s did not finish until after the Second World War when a lot of people did the full Monti with their lives.
Hopefully, Mario and his fellow technocrats and politicians will only have to do the full Monti with their clothes and nothing more, when the worst does come to the worst.
You about nailed the problem, Peter, but forgot Spain, whose bond yields went over 6% on Monday. Spain had a bigger real estate bubble than the USA. I think it is a stealth problem, but might be wrong because a lot of Northern Europeans like to buy RE there. We shall see.
People everywhere had better hope that the Germans eventually agree to some money printing or things will get very bad next year. The only other option that might work to get Europe out of the mess would be massive debt write downs with a lot of fat cat investors taking big haircuts. You KNOW that won’t happen.
Mark Cuban (some really rich guy) just said that he is keeping 50% of his vast wealth in cash because the situation is so dangerous. He and Warren Buffett said credit default swaps and ETFs have the potential to cause a catastrophic stock market collapse.
Anadarko just announced a significant shale oil discovery in Colorado. You would think that 100 years of drilling would have found all that stuff already.
The Canadians of Transcanada said they will spend millions extra to lengthen the Keystone oil pipeline so that it misses the ’sensitive’ sandhills area of Nebraska. If I was in charge up there, I would sell the oil to China and tell Obama to go kiss Hugo Chavez’s butt for his oil.
Here is a stock tip for you rich SPECULATORS only – Magnachip Semiconductor LLC, NYSE symbol MX. They make parts for the new Samsung tablet which is going to be a BIG seller to rival Apple’s ipad. Pull up Reuters data on it on Google Finance, and you will see a strong buy recommendation on the little Reuters graph. You almost NEVER see that. Jim Cramer said it is a good SPECULATION (only) bet if you hang on to it for a while. You could triple your money, or lose it all.
And don’t be all shocked if the IMF and Federal Reserve Bank step in at the last second if a euro meltdown looks imminent. The USA won’t sit by and watch another Great Depression happen. It can print money that people have no choice (for a while) but to use.
Now it is time for some of my sister’s world beating meatballs that she made for my 61st. birthday yesterday. They are the best on this planet.