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Tuesday, July 10, 2012

Why Europe is not so easily solved

I have heard many people proclaim Europe has the ability to fix their debt problems.   Quite often the success of the U.S. TARP program is used as an example.  It is not quite so easy in Europe.  We have a lot of problems with debt in the U.S. just like many other parts of the world.  However, in one respect, we may be better then many countries.  I thought this was an interesting chart of bank liabilities as a percent of GDP for various countries.

The U.S. is actually at the bottom end of the chart for a change.  Our entire banking system liabilities are only about 75-80% of our GDP.  Check out all those European countries.  Even Germany is over 300% of GDP.  Our banks mostly got in trouble because of the subprime debt that was not getting paid back.  That had nothing to do with the U.S. government debt.  Many of these big European banks own a lot of sovereign debt and are getting into trouble because those government bonds are losing value.  Since the problem is being caused by the sovereign debt it becomes a bit problematic to have the governments borrow even more money to bail out the banks.  This is the reason why the latest announcement from Europe is to create a way to funnel money directly to the banks without going through the government.  This is a completely different problem then what we faced in the U.S. and is much bigger.  I think Greece alone is bigger then the subprime mess was.  We were able to finance the entire TARP program without putting any more stress on the banks.  That is not the case in Europe.

There are many articles on the internet detailing problems facing Europe with the latest proposed fix.  I believe a big problem will be time.  It will be at least six months before they can administer any money, and that is a best case scenario.  The way things usually work over there, I doubt it will happen that fast unless there is a crisis.  That is where the slowing global economy comes in.  There are many indications the slow down is accelerating.  Will the Spanish and Italian banks be able to last another six months if the recession gets worse?  Will the funding countries still be willing to contribute money if their own economies are in recession?  Germany is right on the edge of that now if not already there.  I think we are going to be dealing with Eurozone headlines for a long time to come.


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