2011 November 19 Saturday
Asians Bailing From Euro Bonds As Crisis Intensifies

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.

Speaking from Ireland Eddie Hobbs says if Italy fails we are looking at a run on the whole European banking system.

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

Abelard Lindsey said at November 19, 2011 11:06 PM:

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..

Ain't that the truth, Ruth.

Stephen said at November 20, 2011 12:18 AM:

Increasing the ECB's remit is just code for taxpayer funding. Its the money markets vs the people.

A Gentle,Bearded Left-Winger. said at November 20, 2011 1:38 AM:

Basically, he situation in the EU and the USA is a malthusian crisis.
Put bluntly the massive, uncontrolled immigration that these 'nations' encouraged in the past decades #at the behest of the WSJ and 'The Economist'#, rendered labor value down to the subsistence leaving very little surplus production for growth.Also globalist 'free trade' with China #at 1/5th of wage rates#, knocked out labor value and purchasing power.
There is an analogy with England after the Black Death of the 13th century - after that date wages rose greatly, so did innovation, serfdom was abolished, due to a critical labor shortage.
Perhaps a remedy is the mass, forced expulsion of 3rd world immigrants to the EU, thus freeing up resources and boosting purchasing power.

bbartlog said at November 20, 2011 8:13 AM:

'malthusian crisis [...] rendered labor value down to the subsistence...'
Those words don't mean what you seem to think they mean. We may yet see an actual Malthusian crisis in someplace like the Sudan, but fertility declines in the West have to do with culture, status, and expectations (tied to declining wages, to be sure) - not with any actual physical limit.
Expelling the EU's third-world riff-raff would help the countries in question greatly, but it wouldn't solve the systemic problem of governments borrowing more than they can repay. I'm getting the sense that this problem is baked in to democracies generally (absent hard legal constraints). Elect someone for a short term and let them issue 30 year bonds... what do their incentives look like?

Randall Parker said at November 20, 2011 7:32 PM:

A Gentle,Bearded Left-Winger,

What amazes me is the extent to which the American Left has become supportive of policies that make the American poor even poorer. BTW, I'm told by a friend that about 20 years ago Sir James Goldsmith wrote a book that predicted this outcome.

We have resource depletion, ecosystem depletion (most notably with fisheries), population growth, lower rates of innovation, atmospheric CO2 build-up, and many other developments cutting into living standards. These problems are interacting to make things worse.

I doubt the human race will avoid a large scale return to the Malthusian Trap. Selective pressures are causing fertility raising genes and fertility raising beliefs and customs to be selected for.

Stephen said at November 21, 2011 3:15 AM:

This isn't a country level problem because any country the market decides to gang rape will be raped regardless of its credit worthiness. The perverse behaviour of the money market dealers reveals a very grave flaw in the global system of exchange.

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