Europe's Debt Crisis Spreads

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    Nov 20, 2011 7:34 AM GMT
    Things are about to get a lot worse before they get better. France's banks are all effectively insolvent, and now bond investors are waiting to see if Spain and Italy are spiraling the drain. This is not a good time to be holding Euros. Investors further don't trust the politicians who have overspent, and underdelivered. At some point I think those who have a large affinity to government in the US will need to consider what lessons can be learned in Europe.

    http://www.nytimes.com/2011/11/19/business/global/lenders-flee-debt-of-european-nations-and-banks.html?_r=1&pagewanted=all

    Europe Fears a Credit Squeeze as Investors Sell Bond Holdings

    Financial institutions are dumping their vast holdings of European government debt and spurning new bond issues by countries like Spain and Italy. And many have decided not to renew short-term loans to European banks, which are needed to finance day-to-day operations.

    If this trend continues, it risks creating a vicious cycle of rising borrowing costs, deeper spending cuts and slowing growth, which is hard to get out of, especially as some European banks are having trouble meeting their financing needs.

    “It’s a pretty terrible spiral,” said Peter R. Fisher, head of fixed income at the asset manager BlackRock and a former senior Treasury official in the George W. Bush administration.

    The pullback — which is increasing almost daily — is driven by worries that some European countries may not be able to fully repay their bond borrowings, which in turn would damage banks that own large amounts of those bonds. It also increases the already rising pressure on the European Central Bank to take more aggressive action.

    On Friday, the bank’s new president, Mario Draghi, put the onus on European leaders to deploy the long-awaited euro zone bailout fund to resolve the crisis, implicitly rejecting calls for the European Central Bank to step up and become the region’s “lender of last resort.”

    The flight from European sovereign debt and banks has spanned the globe. European institutions like the Royal Bank of Scotland and pension funds in the Netherlands have been heavy sellers in recent days. And earlier this month, Kokusai Asset Management in Japan unloaded nearly $1 billion in Italian debt.


    http://www.spiegel.de/international/europe/0,1518,798695,00.html

    The Euro Zone's Deadly Domino Effect


    Back in March, European leaders promised that all investments in Greek government bonds would be guaranteed until 2013. But, in July, they went ahead and negotiated the involvement of private investors in a Greek debt restructuring. The economic situation in the country had worsened, and the political mood in Germany had shifted. At the time, the European Central Bank (ECB) urged caution. It argued that once you go down that road, you make investors nervous. As a compromise, euro-zone leaders agreed on the following formula: The terms of the participation of private investors in a so-called debt "haircut" would not be renegotiated, and it would certainly not be extended to other states.

    In the following weeks, exactly what the ECB had feared happened. The interest rates on 10-year Italian bonds rose to 5 percent. And there was worse to come. In July, European leaders broke their promises from March. In October, they broke their promises from July. The participation of private investors would now be much higher, they decided.

    Following that summit, investors came to the logical conclusion that politicians have basically been lying at euro summits. They surmised that, if the economic situation in Greece and the political mood in Germany changed, then the owners of Portuguese and Italian sovereign bonds would also be asked to contribute. In the meantime, even normal individuals are now withdrawing their savings from banks across southern Europe.
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    Nov 21, 2011 3:12 PM GMT
    It is getting worse. Countries are effectively broke, and government regulators are effectively forcing banks to sell off assets that include sovereign bonds.

    http://finance.fortune.cnn.com/2011/11/21/european-bank-assets/

    Nicolas Véron, senior fellow for financial regulation at Bruegel, a Bruseels-based think-tank, says the problem of recapitalizing the banks was exacerbated by the fact that many national governments were reluctant to inject cash into their banks because they lack funds.

    "It's an impossible equation," Véron says. "Member states don't want to nationalize their banks, but the marketplace is not ready to provide huge capital infusions. Therefore the fallback position is deleveraging, which is clearly not great economically and may be actually very bad."

    Véron says a European-wide fund is needed to recapitalize the banks, which should be offered some kind of asset swaps to bail them out. Otherwise, he says, the European crisis seems doomed to keep unraveling.
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    Nov 21, 2011 3:16 PM GMT
    SB have you explained to Riddler yet why the country his manufacturing co is in shouldn't get Canada's oil and why yours should?
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    Nov 21, 2011 3:18 PM GMT
    meninlove said SB have you explained to Riddler yet why the country his manufacturing co is in shouldn't get Canada's oil and why yours should?


    We produce in more than one country now. That said, it doesn't surprise me that you're protectionist which makes things worse. Of course the Obama Administration's delays and deferrals with respect to a pipeline will only drive up the cost of energy for Americans.

    Is it any surprise that faced with the tradeoff of jobs and the environmental lobby or unions, jobs loses out every single time?
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    Nov 21, 2011 3:48 PM GMT
    riddler78 saidThings are about to get a lot worse before they get better. France's banks are all effectively insolvent, and now bond investors are waiting to see if Spain and Italy are spiraling the drain. This is not a good time to be holding Euros. Investors further don't trust the politicians who have overspent, and underdelivered. At some point I think those who have a large affinity to government in the US will need to consider what lessons can be learned in Europe.

    The moderates and conservatives already understand the lessons that should be learned. Those on the far left will never understand. They just need to be voted out into irrelevance.
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    Nov 21, 2011 6:12 PM GMT
    socalfitness said
    riddler78 saidThings are about to get a lot worse before they get better. France's banks are all effectively insolvent, and now bond investors are waiting to see if Spain and Italy are spiraling the drain. This is not a good time to be holding Euros. Investors further don't trust the politicians who have overspent, and underdelivered. At some point I think those who have a large affinity to government in the US will need to consider what lessons can be learned in Europe.

    The moderates and conservatives already understand the lessons that should be learned. Those on the far left will never understand. They just need to be voted out into irrelevance.


    And that's increasingly the case. It has been said repeatedly that Obama may have been the best thing for libertarians and and classical liberal economics in a generation.
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    Nov 21, 2011 6:18 PM GMT
    Yay.. the world is collapsing.. 2012 was right after all icon_biggrin.gif
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    Nov 21, 2011 6:46 PM GMT
    riddler78 said
    socalfitness said
    riddler78 saidThings are about to get a lot worse before they get better. France's banks are all effectively insolvent, and now bond investors are waiting to see if Spain and Italy are spiraling the drain. This is not a good time to be holding Euros. Investors further don't trust the politicians who have overspent, and underdelivered. At some point I think those who have a large affinity to government in the US will need to consider what lessons can be learned in Europe.

    The moderates and conservatives already understand the lessons that should be learned. Those on the far left will never understand. They just need to be voted out into irrelevance.


    And that's increasingly the case. It has been said repeatedly that Obama may have been the best thing for libertarians and and classical liberal economics in a generation.

    Slightly different view from an attorney friend. It was interesting discussing politics with him. He is black, which was completely irrelevant to our conversation. His opinion of Obama equaled mine, so it was refreshing not being called a racist.

    But I digress. He was philosophical after the Obama election in 2008. He said that he has to look at the bright side of things, that things happen for a reason, and ultimately good will come of it. With that view, Obama was medicine we took to purge liberalism out of our system for a generation, and we will ultimately emerge stronger for having gone through the experience.
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    Nov 22, 2011 6:57 AM GMT
    socalfitness said
    riddler78 said
    socalfitness said
    riddler78 saidThings are about to get a lot worse before they get better. France's banks are all effectively insolvent, and now bond investors are waiting to see if Spain and Italy are spiraling the drain. This is not a good time to be holding Euros. Investors further don't trust the politicians who have overspent, and underdelivered. At some point I think those who have a large affinity to government in the US will need to consider what lessons can be learned in Europe.

    The moderates and conservatives already understand the lessons that should be learned. Those on the far left will never understand. They just need to be voted out into irrelevance.


    And that's increasingly the case. It has been said repeatedly that Obama may have been the best thing for libertarians and and classical liberal economics in a generation.

    Slightly different view from an attorney friend. It was interesting discussing politics with him. He is black, which was completely irrelevant to our conversation. His opinion of Obama equaled mine, so it was refreshing not being called a racist.

    But I digress. He was philosophical after the Obama election in 2008. He said that he has to look at the bright side of things, that things happen for a reason, and ultimately good will come of it. With that view, Obama was medicine we took to purge liberalism out of our system for a generation, and we will ultimately emerge stronger for having gone through the experience.


    Yeah - I'm hopeful in that regard. I think a lot of people forget the biggest change in 2010 wasn't at the Federal level in the US - it was at the state level which is providing for a training ground for future leadership who come with small government principles ushered in by the tea partiers. I am not however optimistic about Europe and expect that the Euro will collapse - that it's a question of when not if.