Thursday, February 19, 2009

Europe's in trouble, says Gary North

Normally, I would've put this article in my "Sunday Best" category. It sure deserves to be called "best news-related article". However, its implications are too important to wait for Sunday.

Gary North writes about a Daily Telegraph article which, before being edited, said that a secret EU report available to DT editors warned about the magnitude of toxic assets on the balance sheets of European banks. They may amount up to 16,3 trillion pounds which is about 18,4 trillion euros. Failure to bail out these lending institutions with a comparable sum may lead to bank failures and ensuing bank runs. A breakdown of major European banks would basically collapse the European economy which is just as dependent on credit as any other. Plus, if people lose their savings, there's nothing left to spend or invest.

Worse even, since the European community consists of countries with vastly different debt conditions and financial credibility, a uniform solution is highly unlikely to be found if such a great sum had to be scraped up. For example, while investors may still have a lot of trust left in Germany's stability, they may refuse to lend to Italy. But since both Germany and Italy are part of the Euro monetary union, Germans would have to tolerate massive inflation by the European Central Bank to make up for a lack of creditor confidence in Italy. How long will they be willing to take that?
In my view, the European public still has faith that the governments and the central banks will successfully intervene to restore commercial banks. But if the original article was correct, that 44% of bank balance sheets have disappeared, then the public is living in la-la land. The entire structure of Europe's capital markets is at risk. Or, I should say, what remains of the capital markets is at risk.
Reality is an unforgiving mistress. If the public refuses to acknowledge the severity of a problem, it will not disappear. It will come back in an even worse fashion. If European banks have lost nearly half of their balance sheet, I honestly don't know what's going to happen. It could be everything from an exceptionally long and severe depression to a complete breakdown of civilization, but in any case, you bet it won't be pretty.

The validity of the cited Daily Telegraph article has not been verified as of yet, but I wouldn't take that as a relief. Try to imagine what's going to happen when welfare checks stop coming in because governments are out of credit and a vast number of people lose their savings. You can't picture it? Neither can I.

Brace yourselves, we may be in for a rough ride.

No comments: