Many cans have been kicked down the road. The cans have grown larger and more numerous and the road is looking pretty blocked. Investors are beginning to panic. Ambrose Evans-Pritchard of The Daily Telegraph reports on Asian bond holders who are bailing out of European holdings.
Asian investors and central banks have begun to sell German bonds and pull out of the eurozone altogether for the first time since the debt crisis began, deeming EU leaders incapable of agreeing on any coherent policy.
This could turn into a stampede. How do you view your job security? Take a cold hard look at it. The financial markets are headed for rough waters.
Andrew Roberts, rates chief at Royal Bank of Scotland, said Asia's exodus marks a dangerous inflexion point in the unfolding drama. "Japanese and Asian investors are for the first time looking at the euro project and saying `I don't like what I see at all' and fleeing the whole region.
Felix Salmon says European banks are in a liquidity crisis. Unlike with US banks in 2008 and 2009 the European Central Bank is not tasked with assuring bank liquidity. The Germans look unlikely to support a massive expansion of the ECB's remit. Given that even German interest rates are rising as investors flee Europe it is not surprising that Germany and France have held talks about fracturing the Euro zone. It seems unlikely a single currency zone can survive.
The New York Times is reporting the same flight from European bonds. A serious liquidity crisis is brewing. If countries default on their sovereign bonds then a solvency crisis will follow as bank losses on sovereign bonds put them underwater.
Financial institutions are dumping their vast holdings of European government debt and spurning new bond issues by countries like Spain and Italy. And many have decided not to renew short-term loans to European banks, which are needed to finance day-to-day operations.
Tough talk from Euro elites on Greece have scared investors about Italy, Spain, and other at-risk countries. Can the mainstream consensus admit the Euro was a bad political idea??
In fact, aggressive remedies for Greece may have worsened Italy’s situation this week. The never-before-voiced suggestion that countries weren’t forever bound to the euro may have scared Greek leaders into submission, but it also scared bond markets into raising the price that Italy pays to borrow money to levels that forced Greece, Ireland and Portugal to take bailouts.
That’s precisely what European leaders didn’t want. Problems in the peripheral countries were always manageable — in the worse case, France and Germany’s hulking economies could swallow the cost of paying off the tiny ones. Italy, however, owes creditors $2.6 trillion — far too large an amount for France and Germany to backstop.
Instead of "too big to fail" we have "too big to save". America will get there eventually.
This debt crisis isn't of a short term nature. Slowing economic growth makes it much harder to service debt. The Western countries can't grow out of their debts because the Western countries (including the United States) are in decline. The American middle class has been getting poorer for decades. Putting both members of couples to work delayed the living standard decline for a while - at least for the married. But that way of compensating for decline has run out of steam.
The great hope is economic growth. American and European politicians still keep hoping for it. But Europe is heading back into recession and rising oil prices threaten to do the same for the United States.
Europe may be slipping into a “deep and prolonged recession” as high levels of government debt, financial market turmoil and political paralysis stoke a dangerous downward cycle, the European Commission said Thursday.
The Euro currency zone needs to drop about a half dozen members. Maybe the southern Europeans could shift to a Mediterranean currency called the Med.
Let me repeat some advice: Try harder to learn more valuable skills. Try harder in your career. Live a more frugal life. The economies of the Western democracies are in serious troubles that will take many years to work out.
|Share |||By Randall Parker at 2011 November 19 04:35 PM Economics Sovereign Crises|