On November 30, unnoticed by most of the American public, the United States began the financial bailout of Europe. It was a big deal, and the financial markets started a sustained move up as the investor class heaved a sigh of relief that Europe wasn’t going to go under…or so says conventional wisdom.
Americans, for the most part, are blissfully ignorant about the problems in Europe and specifically its currency, the Euro. We know that it is there. We know that travel to Europe is expensive. Some of us know that the Eurozone collectively is the largest economy in the world. And even less of us know that it is America’s largest trading partner.
The European Union is NOT a United States of Europe. It was formed by a series of treaties beginning at the end of World War II, culminating in a part time European Parliament and an almost single currency. Britain, for example, is a member of the European Union but declined participation in the Euro opting to keep its own pound sterling currency.
It is a flawed system. It is not a unified system. While there is a single European Central Bank, it cannot issue “Euro Bonds.” Each country maintains its own fiscal policy resulting in different interest rates in each country with no central regulating authority, a function served by the Federal Reserve Bank in the United States (Ron Paul…take note). The result is bonds issued by countries denominated in Euros at wildly disparate interest rates, guaranteed by…are you ready…credit default swaps (sound familiar)…and nobody knows who owns bonds issued by the good countries (Germany and France)…or the bad countries (Portugal, Ireland, Italy Greece and Spain…the Piigs). If any of the countries default the currency collapses making all of those bonds denominated in Euros worthless. And there is a lot of debt floating around. When a currency gets into this kind of pickle, the solution is to devalue the currency by printing more money to pay the debt. The Euro has no such mechanism. And politically, the Germans and French citizenry does not want to be in the position of having to pay for the financial indiscretions of the Greeks and Italians.
So…at the end of November the collapse of the Greek and Italian debt markets seemed imminent, and credit denominated in Euros froze in Europe…exactly like in the United States in September of 2008. It was world financial collapse Part Deux. European banks refused to accept overnight loans denominated in Euros and demanded Dollars. Interest rates for dollars soared…the credit default swaps guaranteeing Euro denominated bonds (issued by…get this…AIG) were on the verge of default.
In a panic, the central banks of the world led by the United States, including Russia and China, poured dollars into the European system by freezing interest rates at an artificially low rate for money borrowed in dollars by and between European banks. The system unfroze, and the can was kicked down the road one more time.
The financial markets soared in relief. Unfortunately, the bigger picture is bleak. The debt is still there. The Germans and French are still not ready to devalue their currency to bail out the Greeks and Italians. While there are discussions ongoing to force the Piigs to relinquish sovereignty to a central European authority, the political realities of that happening are still lost in the afterglow of the European bailout by the United States and friends. As it is currenlty structured, the crisis has been averted until January 1st when it will happen all over again.
This is scary stuff, every bit as scary as what happened here in September, 2008. And like here, the debt doesn’t dissipate…it only gets worse.
As the saying goes…never a lender or borrower be.
No comments:
Post a Comment