Rogier posted an interesting counterpoing to my French Bank run thesis. For those who haven’t been following, reference SocGen CEO Dismisses Rumors, Says France Is Not US – He’s Right, But It May Be Worse And Bank Run Can’t Be Ruled Out!!!. Rogier’s counterpoing is the Citigroup analysts William Buiter’s report on the ECB being capable to bail out all of the indebted Europe, as well as all of indebted Europe’s banks as well – simultaneously, by printing money but not prinitng so much as to stoke inflation. Yes, that does sound rather extravagant. As a matter of fact, I was feeling his story a little more until I actually typed that statement down and realized how far fetched difficult it may be.
One of the failing precepts in the article has been the mindset that is burying the profligate states as we speak, and that is the circular argument. Reference my discussion of this phenomenon as it refers to Greece: Greece Reports: “Circular Reasoning Works Because Circular Reasoning Works” – Or – Here Comes That Default!!!
The gist of the story is that Greece will solve its over-indebtedness issues by acquiring addtionals debt. Hey, we just traveled full circle!
Greece will implement austerity measures that will slow growth and implemenation, thus cut government costs while the country grows the economy out of the hole. But wait a minute here! How do you grow your economy out of a situation by slowing economic growth through austerity. Did we just spin around in a circle again? Below is an excerpt of the Citigroup report that drives the circular reasoning concept home…
You see, the problem with the French argument is that the sovereign debt crisis, (which I feelI have credbily predicted and called accurately from the beginning. Reference the Pan-European Sovereign Debt Crisis series, starting with The Coming Pan-European Sovereign Debt Crisis – introduces the crisis and identified it as a pan-European problem, not a localized one. The primariy problems emanated from oversized banks (Ovebanked, Underfunded, and Overly Optimistic: The New Face of Sovereign Europe) who got into trouble taking undue risks.
Sovereign Risk Alpha: The Banks Are Bigger Than Many of the Sovereigns
This is just a sampling of individual banks whose assets dwarf the GDP of the nations in which they’re domiciled. To make matters even worse, leverage is rampant in Europe, even after the debacle which we are trying to get through has shown the risks of such an approach. A sudden deleveraging can wreak havoc upon these economies. Keep in mind that on an aggregate basis, these banks are even more of a force to be reckoned with. I have identified Greek banks with adjusted leverage of nearly 90x whose assets are nearly 30% of the Greek GDP, and that is without factoring the inevitable run on the bank that they are probably experiencing. Throw in the hidden NPAs that I cannot discern from my desk in NY, and you have a bank that has problems, levered into a country that has even more problems.
In the beginning, it was thought that these problems were that of the peripheral EU and CEE states only, but that was (and is) definitely not the case. You see, this is as much a case of humarn behavior as it is macro-economics. If one understands that concentp, the spread was easy to see coming from early last year, reference The Coming Pan-European Soverign Debt Crisis, Pt 4: The Spread to Western European Countries. The consequent post, also explains what many seem to be overlooking, Financial Contagion vs. Economic Contagion: Does the Market Underestimate the Effects of the Latter?
Now, as a result of sovereing states privatizing profits and socializing losses, they attempt to take multiples of thier GDP on the public balance sheets in terms of economic risks. Yes, it does sound both absurd and unsustainable, and accuracy is endemic on both counts. This particularly so when the health of the sovereign states themselves is callled into question due to the foibles of human nature in terms of honesty – referencing Lies, Damn Lies, and Sovereign Truths: Why the Euro is Destined to Collapse!
The attempt to save insolvent banks that are multiples of the size of the soverign states that try to save them is a recipe for disaster that simply creates insolvencies on both sides of the public/private economic membrane, versus just the side that it originated in. Greece is proof-positive of said posit: How Greece Killed Its Own Banks! Greece forced its banks to buy Greek debt to stoke the perception of demand. Said debt collapsed in value, and voila!
The same hypothetical leveraged positions expressed as a percentage gain or loss…
The natural result of several nation-states attempting the same failed strategy, Contagion – Introducing The BoomBustBlog Sovereign Contagion Model. Contagion is exponential in nature, yet I feel many analysts are still thinking linear. Again, Financial Contagion vs. Economic Contagion: Does the Market Underestimate the Effects of the Latter?
This point of view started as:
Investment research | The Bull Argument For Europe Is Credible, Except For The Circular Argument: You Can’t Solve Debt Problems.
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