Don't expect to hear any of this in the North American press. Europe may as well not exist according to them. Either that or they unquestioningly took the politically populist rhetoric that, "the whole crisis belongs to America, not Europe" far too literally.
Despite the major headwinds facing the US economy (consumer deleveraging, CRE, California, pensions, etc), the next round of panic will likely originate outside the US and subsequently magnify the aforementioned headwinds. Surely, this will provide a convenient scapegoat for the Obama Administration.
The leading candidate for such a catalyst would intuitively be the largest economy in the world. No, not the US. The European Union. As mentioned recently in Der Nächste Schuh, contrary to popular belief, the German banking system was just as irresponsible as the American. The difference was that loans were not being made to Germans, but rather to foreigners, so the effects were not as readily noticeable. But as it turns out, the Landesbanken (German state-owned banks) who's boards of directors are filled with the politically well connected, had been a dumping ground for US toxic waste - evidently the "benefactor" of German trade surpluses.
Of course, Germany wasn't alone in the mad dash to lend to foreigners. Austria is up to its eyeballs in loans made to Eastern Europe. Sweden had done the same in the Baltic States. Spain pumped money in to cajas that were used to finance a property boom fueled by foreign investors. Ireland had engaged in an Florida style construction boom as well. That is only a brief summary. In each case the circumstances are somewhat different, but the cause was readily apparent: The ECB's attempt to keep one interest rate for the entirety of Europe caused an unnatural boom in places where loose lending standards ruled. Europe's major economies footed the bill via inflation and sticky unemployment.
Now the jig is up. Spain, Ireland and the Baltic states have collapsed into depression. Their debts will never be paid. Eastern European currencies have tumbled, massively increasing their debt burden. They either hyperinflate or default. All of these loans, in addition to the tens of billions of US toxic waste remain on the balance sheets of European banks. And for the most part they are still valued at 100 cents on the dollar.
This is obviously of concern to those hoping to see recovery in the near term. The IMF considers itself among the concerned. From the Daily Telegraph:
IMF tells Europe to come clean on bank losses
"To restore confidence, you need total disclosure of possible losses," said Dominique Strauss-Kahn, the IMF's managing director. "Not only losses which are linked to the original sub-prime crisis, but also the losses linked to the slowdown in the economy, and impaired assets. There are lots of things that still have to be disclosed," he said, adding that credit mechanism remained jammed.(emphasis added)
The latest IMF report said the chance to raise fresh bank equity while optimism lasts should be "seized without delay" and demanded a "comprehensive review to assess capital needs and viability."
"Stresses persist, conditions for access to bank lending are tight, funding costs remain high. Sizeable losses lie ahead as the recession unfolds. The financial sector is hamstrung in fulfilling its vital intermediation role."
The IMF says eurozone banks will need to raise a further $375bn (£235bn), compared to $250bn for US banks, and has called for a stress-test along the lines of the US Treasury probe.
There are widespread concerns that Germany in particular is hiding bank problems until after the September elections, using its "bad bank" scheme to keep "zombie institutions" alive.
The eurozone is not yet out of the woods, and risks sliding into a deeper downturn. "Adverse feedback loops between the financial and real sectors could trigger a protracted deflation," said the fund.
Europe's financial crisis is just getting started. Political attempts to stall the realization of these problems may be overcome by countervailing political attempts to expedite them. It's going to be a long, hot summer.
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