Wednesday, September 28, 2011

Europe in Crisis?

Have been away for almost a week. A Memorial Service for a dear friend, organized in a 100 year old vacation house at a lake in upper New York state. Here's the view from the deck at sunset:

My friend died three hours after his twin grandchildren were born. He knew they had arrived - six weeks early. A miracle. So the service combined spreading some of Grampa's ashes in the lake and doing a baptism-like ceremony with the twins (boy and girl), using lake water to touch the sign of the cross on each of their foreheads. Very sweet. Lovely. Special and sacred time.

I have been thinking and reading a lot about Europe. The Financial Times has great articles on what's going on. Look for the "live coverage" link.

So what's going to happen? Is Europe in crisis, or not? The experts mostly say yes. The market says maybe. Stocks were up Monday and Tuesday; down today. Late Sunday, rumors of a deal surfaced: 50% Greek bond write down, recapitalization of the banks, and a large EFSF (European Financial Stability Facility) war chest to do this, plus support the debt of shaky sovereigns. Two trillion Euro, with the EFSF gearing up thru the ECB (European Central Bank). Most all European officials denied this was happening. It took until Wednesday, it seems, for the market to decide this very desirable deal probably wouldn't happen.

Why not? The ECB, originator of the Euro, has essentially the same powers as the Fed in the US to create money and issue debt. The Fed created about $16 trillion of new money in the post-crisis 2008-2010 period, much of it in the form of loans through TALF (Term Asset-Backed Securities Loan Facility). This is what Secretary Geithner is urging the Europeans to do. It was highly successful here. It should work in Europe. But will the ECB do it, and probably put this crisis to rest? I am really not sure. If I had to place an up or down bet tonight, I would bet No. What's up?

First, the Germans in particular look at what's happening as a "debt crisis", brought on by undisciplined, noncompetitive countries in South Europe (the GIIPS - Greece, Ireland, Italy, Portugal and Spain). Wolfgang Schauble, German Finance Minister, says "You cannot solve a problem using the same approach (debt) that was the cause of the trouble in the first place." Fiscal consolidation, in other words, austerity, is the key to solving the problem. Bleed the patient, until he is healed - this seems to be the argument. Many experts say this won't work. I agree.

Second, the ECB's charter apparently prohibits "monetary financing", or printing/creating new money to support sovereign states in the Eurozone. The German High Court has just ruled that Germany can take part in the EFSF, but any new contingent liabilities must be precleared by a committee of the Bundestag. European leaders are much less willing to throw liquidity at the problem than the Fed. They feel there are legal restrictions against such a move. And many of the key leaders feel that only austerity combines economic and moral correctness.

The Germans (Austrians, Dutch, Finnish, etc.) are wrong. If this attitude prevails, as well it might, the Eurozone will begin to unwind. They may bandaid their way through the Greek crisis (the current 21% bond haircut on Greek debt is nowhere near enough); but even if they do, markets will stay unsettled because there will be no Lender of Last Resort, like the Fed, who will stand up and say: "We will provide whatever liquidity is needed. Period." Without that, this is and will be a crisis. It will blow up by a market attack on either a weak sovereign (Italy, Spain) or one or more weak banks. And if it blows, it will quickly cross the Atlantic, flatten one or more banks, and put us into a second recession.

My odds: 51% of a blowup; 49% for an intelligent resolution, with Germany saying "Sue me" to opponents, and Merkel taking the lead in setting up a Euro facility big enough to quench this uncertainty, as Geithner/Bernanke did in 2008/9.

Pray for good sense AND a large dollop of compassion.

No comments:

Post a Comment