Saturday, October 1, 2011

The Final Battle for Europe Approaches

In my humble opinion, the Final Battle for Europe draws near. Simply put, a good many {if not most} of Europe's biggest banks are essentially insolvent. In addition to the banks, many of the governments are hopelessly indebted, led by Greece, Ireland and Portugal.

Over the last 16 months {since the very unreported but serious crisis in May of last year} the European Union, the European Central Bank and governments have tried one bailout plan after another, each having to deal with a more serious crisis because the previous plan was inadequate. Europe's leaders have been one step behind each and every time, including this week when the Bundestag {Germany's Senate} finally passed a small expansion of the EFSF {Europe's bailout fund}which was proposed in July. Since then, Italy's biggest banks and their government bonds have crumbled apart, making the EFSF passed just this week woefully inadequate.

A week ago, US Treasury Secretary Tim Geithner formulated a plan to essentially leverage the existing EFSF by about five times, from about $450 billion to $2 trillion. This expansion will be backstopped by the European Central Bank, which essentially puts the entire Euro currency at risk-- and the governments thereof, since they have agreed to backstop the currency. This plan demands that the EU nations pass this plan by the next G20 Meeting in Canne, France the first week of November. This week, the markets have risen nicely in anticipation of this massive plan to finally deal with the problems.

The problem is, Germany {Europe's biggest, richest nation} seems to be balking. Chancellor Merkel, the nation's President, the head of their central bank, and the top judge of their version of the Supreme Court has all come out and said this is not only not happening, but is very likely unconstitutional. Worse, the German people themselves are, by large margins, dead set against this.

Geithner's Plan is a bold one, a big one. The problem is that, in proposing a plan this big, you also acknowledge the size of the problem. Worse, nobody has asked the question-- what happens if it does not pass in Germany after finally acknowledging how serious the problem really is ? As noted above, there are serious doubts whether the Germans will pass this. Confidence in the markets {European ones especially} will be crushed.

And here we are. As this month of October progresses, Geithner's Plan will be making the rounds in Europe. I believe that this story will be the prime mover of the markets this month; if there is good news, stocks will soar. Similarly, bad news will cause stock markets to sink. At some point, this plan will reach Berlin and the Bundestag. If there are delays in the vote or legal complications, look out. If the G20 Summit arrives and the measure is not passed, the markets will be in some real danger. Delays in the Bundestag vote will {rightly} be seen as a sign that the votes to pass the measure are not there.

If the markets begin a serious skid as the delays mount, we will quite probably have arrived at what I call the Final Battle. In order to stop the market carnage, I forsee multiple central banks co-ordinating action, including The Fed and probably the Peoples Bank of China. The Final Battle will have arrived. Who will win ? I'm not sure-- but I can tell you who will lose.. us serfs. One clue as to how the Europeans ultimately plan to deal {or not} with this might well come very soon-- Belgium's Dexia Bank, a huge bank, looks like it's going to have to be nationalized. The problem is, Dexia is nearly twice the size of the country it's located in, Belgium.  The ECB {well, someone anyways} will have to do something because the Belgian state not only has no government at the moment, but would be completely unable to save Dexia-- it would be rather like a ground squirrel attempting to catch a falling hippo. Keep an eye on this potential mini crisis for clues. 

10 comments:

  1. typo? "Europe's biggest banks are essentially solvent"

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  2. Even if EuroBonds were issued, that doesn't change the fact that many of the Euro countries consume more than they produce. As such, they are in no position to pay back these bonds in the foreseeable future.

    So, not only are the banks insolvent due to holding bad debt, the "answer" going forward (according to gov types) is to issue even more debt. Since Greece,Ireland,Italy,etc can't pay off current or future debt, the bankers wish to have their proxies (politicians) get others to pay the shortfall. That means Germans and YES, Americans (via the Fed and IMF).

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