European Debt Crisis

2011-09-19T22:28:00.000-07:00

Europe is facing up to the problems of sharing one currency for the first time. How are they handling this and what are they planning to do? There has already been a 1 trillion (in American dollars) package for countries in trouble in 2010. Now some countries need even more money and some do not want to cut their budget or raise taxes. This sounds a lot like America, an argument whether the government should spend to stimulate growth in a recession or should they cut down to match recession revenues. The Housing Bubble here in America has pulled the water away from other countries and we see who can float and who will sink.

(If I am right this than this is the percent home prices increased from the previous quarter. So each year is compounded from the last. So it would have increased 2.5% in 1995 and then 2.9% in 1996, not just 2.9% from the base year)

It is looking pretty bad over there because a lot of people who own the massive issuing of debt might not get their payment and lose their money. The money could amount to hundreds of billions easily they are loaned up to each other in a complex spiders web. This is what you call "systemic risk". This again sounds a little familiar to our country back pre-2007. Then we had a financial system that was really dependent on home prices increasing more as a percent than the last quarter. All of our banks were tied together with loans, CDOS, MBS, CDS and other complex financial instruments.

The situation was complicated, there were many things going on at the same time. There was insurance policies that made a ton of money as long as their insured mortgages did not default. There was people at the investment banks selling packages of mortgage's in the billions to Americans and to a ton of foreign investors (They were pissed I imagine, they invested in America so something like this will not happen). You had the lawyers who were churning huge bonuses from writing these packages and being hired on to stay current with the complex loan packages. And they all had a bubble that had to keep getting bigger to support the increasing amount of people in it. Well bubbles pop if they get to big.

Europe was a similar again to America by having a flow of foreign capital, Something Ben Bernanke called "Capital Glut" referring to the extra capital as fat that needed to be shed. During the boom years (Tech Bubble, and Housing Bubble) money was flowing into many Western countries from the increase in saving in Eastern countries, Europe and America went further and further from a saving based economy to a consumer based economy. Countries invested into Europe and America to avoid political instability, corrupt fascism and inflation in their home country.

On top of all of this Germany was becoming the dominant player by building a manufacturing exporting based economy. On the other side many countries ran deficits. When a country is a net importer they have to borrow money to buy the things in their economy. The person who exports more is lending money to buy its own good essentially. This is like payback on the money with interest. If they do not default of course, which is almost certain in Greece's case, but not likely in France, Germany or the British (non-Euro currency).

Politicians were using those years if growth as their basis for future expenditures. Budgets were expected to be large as they currently were, or larger. Pension fund managers assumed that they could earn the high payout that they promised public workers who make up the majority of many Europeans economy.Bonds were issued with intentions that there was going to be regular tax income for the municipalities that had to pay them in the next 2-30 years. Everyone assumed the best, but not everyone prepared for the worst.

The Euro was the reserve currency for some places. Look at this Map of nations pegged by the dollar or Euro

(Worldwide use of the U.S. dollar and the euro)

United States

External adopters of the US dollar

Currencies pegged to the US dollar

Currencies pegged to the US dollar within narrow band

Eurozone

External adopters of the euro

Currencies pegged to the euro

Currencies pegged to the euro within narrow band

So Eurozone enjoyed the benefits that came being held in such confident contempt among the world and being a combined economy of many smaller specialized economies. The GDP of the EU and and spent heavily in social packages like 6 week of vacation in France and a 61 retirement age in Greece. They are going down a more narrow path then America, who is cutting a decent amount already and more being proposed. There is talks in one of the three rails of politics you were not supposed to touch. Europe is still trying to hold on to it though. The packages that have are not that much better than there current situation either.

This will not work competing against America, China, Japan, Brazil and Russia from an economics point of view.Although there are exceptions: companies are investing in Paris, France where There are more international Fortune 500 companies headquarters than New York, London and Munich. But now even they have shown stagnant growth with a 0% growth in GDP for that quarter.

I think that the Germans and France are going to come out on top of this. Germany has a good mix of capitalism and usually has a bond yield below our 10 year treasury. The market finds them less likely to default then the United States. I guess they have the right mix of European Socialism and American Capitalism principle. The French have a good economy also and one of the worlds largest.

Well you had those that felt they could squeeze some value out of it. In the increased world of globalization currency exchanges need to be opened to foreign markets easily to smooth traffic. This should have worked out in Europe where travel among countries is frequent and people might speak 2 or 3 languages because they are so close to each other.

Well its not working to well right now. They have geographical problems that require things like this. But when countries can together for central planning like this is does not work. One side takes advantage of the others and outsmarts them with wild finacial terminology, complex accounting standards, and then politics. If Europe had their own independence from each other the risk would all be in the countries that made their mistakes. Now they are punishing those that had real growth to pay for the ridiculous things Greece, Spain, Portugal, Italy, and other smaller players already enjoyed.

This European Debt problem is coming more and more to the light recently. The markets are very shaky right now thanks to it. The Geithner rally last week we seen is wearing off now that reality is kicking back in. America will start to grow again, but Europe is in some dark times right now. People are questioning their accounting standards and people are asking when will Greece default instead of if they will.

Citigroup, JP Morgan, Merrill Lynch and many small players in Americas Financial Markets have exposure to these Countries. They have been ripped to shreds and now huge mutual funds, hedge funds and private investors are pulling out of Europe for the foreseeable future. It is just a race to get out before there is more bad news leaked. I doubt that this problem is going to be solved soon, I am usually very optimistic, but there is something fishy in Europe and that smell drives away investors like garlic to a vampire. I will touch more on this issue in a future blog. This has gotten to big for just 1 blog.

M&N General Financial Services

Facebook-finance question

Twitter- M&N General Finance

Blogger-M&NGeneralfinance@gmail.com

Email-M&NGeneralfinance@gmail.com