"There is no means of avoiding a final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as a result of a voluntary abandonment of further credit expansion or later as a final and total catastrophe of the currency system involved."
- Ludwig von Mises

Wednesday, November 17, 2010

EC President van Rompuy: "A Crisis of Survival"

It's a bleak situation for the EU.  It says a lot when the European Council President speaks so openly about the current situation.  (In my opinion, his "crisis of survival" quote can easily apply to the entire global financial system)  From Investment Week:

European Council president Herman van Rompuy warns the euro and wider EU face a "survival crisis" as the continent's sovereign debt crisis escalates...

van Rompuy, who chairs EU summits, told a Brussels think-tank the future of the 27-nation union was at stake in the latest spasm of a debt crisis .

"We are in a survival crisis," he told the European Policy Centre. "We all have to work together in order to survive with the euro zone because if we don't survive with the eurozone, we won't survive with the EU."

Full Article HERE.
And from today's Wall Street Journal:

Banks' Exposure Stirs EU Contagion Worries

LONDON—One reason why Ireland's problems could ripple throughout Europe is that banks across the continent are holding huge quantities of loans, bonds and other debt issued by Irish companies, individuals and national and local governments.

All told, European banks were sitting on more than $650 billion of exposure to Ireland as of March 31, according to the Bank for International Settlements.

The U.K. banks are the international lenders with the most at stake. As of March 31, the latest data available, the banks had exposure of about $222 billion to a variety of Irish institutions, according to BIS. That's about one-fourth of the world's exposure to Ireland. About $42 billion of the U.K. banks' exposure is in the form of lending to Ireland's battered banking sector.

German banks aren't far behind the U.K. They had a total of almost $206 billion in exposure to Ireland, according to the BIS, including $46 billion of exposure to the country's banks.

From the article:

So is it any surprise why the UK is eager to help?  See:  UK Osborne: UK Ready To Help Ireland.  From the article:
Osborne was speaking to reporters as he arrived for a meeting of finance ministers from the European Union, and minutes after European Commissioner for Economic Affairs Olli Rehn confirmed that the U.K.'s help is being sought as part of a financial support package for Ireland.

"It's in Britain's national interest that the Irish economy is successful and that we have a stable banking system," he said. "So Britain stands ready to support Ireland in the steps it needs to take to bring about that stability."
Meanwhile across the pond, the US is still struggling with the foreclosure crisis, and it looks like many municipalities and states are facing solvency issues of their own.  From a couple months ago, here's analyst Meredith Whitney predicting US States needing a Federal bailout in the next 12 months:

Here's one thing that analysts overlook - All these things are happening real-time, all at once. Remember when corporate america discovered "synergy?" For those that don't recall, synergy was a common reason large multinationals purchased subsidiaries. Their reasoning was that with the marriage of diverse yet related business, they can cross sell and attain higher revenues. Thus, the sum total was greater than the aggregate parts. Two plus two would equal five. Well, this applies to crises as well, in my opinion. Everyone is looking at all these crises as if they exist in a vacuum, indendent of eachother.

What I am saying is that in a complex world of interdependency, co-existent crises feed off eachother in ways few can anticipate - and the net result may be two plus two equals ten, or maybe one hundred. It's a synergy of destruction.


Dave Narby said...

Heheh... I have to admit, I missed that synergy works both ways myself!

Contrary as to what most people in the US seem to think, I have a feeling it might not resolve itself very easily (and could result in a lot more market downside before it is).

Mithos, you can speak to this better than I (since you live there), but my thinking is that unlike the states in the US, the EU member nations have a lot more autonomy, and are less inclined to play along. This is easily missed by those with a US-centric view. I could be wrong.

Misthos said...

Regarding synergy: hardly anyone covers this! I can think of three people that tie it all together, yet have somewhat different conclusions: Jim Rickards, Chris Martenson, and Nicole Foss of the Automatic Earth.

But what we mostly see on TV is piecemeal analysis that ignores everything else.

As for the EU and individual autonomy - it's a double-edged sword. Yes, the countries have more autonomy which is rooted in history and culture. (And people don't move between countries at the same rate that people move between states in the US).

However, Europeans are learning a difficult lesson about money: They don't control it. And even though life was great as the debt bubble was expanding - now they are trapped in a deflationary collapse, in my opinion. They can't inflate for example, like Turkey has recently done.

In my opinion, the EU and the Euro has severely distorted these peripheral economies and the correction will be extremely unpleasant, to put it mildly.

Many EU leaders will do whatever they can to keep it together, but I think, if there is EMU (European Monetary Union, not EU) collapse, it will be started by the masses protesting. Individual governments still need to answer to their people. And as I have been following this for the past few years, I've noticed that more and more ordinary people are questioning the Euro.