It Could Be A Lot Worse, We Could Be In Europe

By: ispeculatornew
Date posted: 09.08.2011 (4:33 am) | Write a Comment  (2 Comments)

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It always look greener on the other side of the fence doesn’t it? Maybe not ALWAYS. I think it’s easy for Americans to think that things could not get worse, that the incredible deficits, the political paralysis and the still ongoing credit issues are huge issues. They are, don’t get me wrong about that. However, what is quickly becoming a much bigger crisis is Europe.

No, I don’t mean the IMF sex scandal or the fact that Silvio Berlusconi seems to be managing Italy as if it were his. I’m not even talking about the tragic events that occurred yesterday when an entire KHL hockey team died as its plane crashed while flying to its next game. No, I’m talking about the economic and financial future of Europe, a critical part of the increasingly connected.

Why Europe Is Screwed

Governments Are Going To Default: Countries such as Greece, Ireland, Portugal and bigger ones like Spain and Italy are all having major issues. Why? They have too much debt, too many commitments, are collecting too little taxes and are unable to turn things around. They might have a shot but that is becoming increasingly difficult as investors become more afraid. Why? Because imagine how much of a toll those interest payments are becoming. 2 year Greek governments are trading at yields close to 50%!! That is incredible. That means that governments that are already struggling in Spain and Italy are having an increasingly tough time paying off their debt.

Banks Are In Big Trouble: No worries if governments go down, the private sector will survive right? Survive yes. Thrive? Not really. Those two are linked a lot more than you could imagine, especially in the banking sector. In fact, Deutsche Bank CEO Josef Ackermann recently said that:

“It is an open secret that numerous European banks would not survive having to revalue sovereign debt held on the banking book at market levels.”

What does this mean? Many banks can hold Sovereign debt that is valued as if it could not possibly go bankrupt. We know now more than ever how crazy such a policy is. Keeping valuations artificially high rarely works.. We don’t need to go back very far to see examples. How will Europe be able to save its banks? It’s not clear. But seeing Apple (AAPL) being briefly worth more than the sum of the largest 35 European banks. Insane? Probably. It still does show you how bad things are.

Policies Are Not Being Changed: So many changes are needed but of them are actually taking place. There are all kinds of reasons why but unions are a major one that are making it extremely difficult if not outright impossible to make some necessary changes.

The Rich Countries Are Tired Of Bailing Out Their Neighbors: It’s no secret that Germany has been a big part of bailing out Greece and others but with Germans becoming increasingly tired of doing so, there are signs that current parties in power might end up losing power and being replaced by ones that have pledged to stop these bailouts. What will it mean? It’s unclear of course.

How Will All Of This End? I’m not sure but I can tell you that I am very pessimistic about Europe’s prospects for the next 5-10 years. How about you?

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  1. Comment by Bret @ Hope to Prosper — September 12, 2011 @ 3:08 pm

    I talked about this with someone from our office in Germany around the time of the first default in Greece. He didn’t seem to think it was think it was a big deal. I’ll bet he feels very different now.

  2. Comment by Intelligent Speculator — September 13, 2011 @ 4:32 am

    @Bret – No doubt yes, it’s all playing out very quickly, I’m surprised honestly. Greece’s default probability is now set at 98% by the markets… Should be interesting.

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