Okay time for the first entry. The start of this week has been very interesting. The euphoria of Barrack Obama taking office was offset by the stark realization that the worldwide banking system is still a mess. The majority of the talking heads are absolutely blind to what is going on. Whether it is the “Bad Bank” solution a la Resolution Trust Corporation in the Savings and Loan Crisis or just plain nationalization – the European route with Fortis, RBS or Lloyds – the end result is lower stock prices.
Spent some time today looking at the European financials in detail. Getting tired of revisiting this situation but I found myself drawn to how badly these banks have been managed. Without getting into much detail and generalizing two problems jump out. First the leverage was much higher in Europe than the U.S. and second and even more alarming is the clear lack of transparency within the entire European system. There is much more pain to come.
One of the unintended consequences of the downfall of the European banking system might be the ultimate failure of the Euro to exist as a currency. The United Kingdom is well on its way to nationalizing its system and Germany and France are not far behind with bank bailouts. However the PIGS (Portugal, Italy, Greece and Spain) still have much work to do. Just how big the capital injections / fiscal stimulus will be is still not clear. The question will ultimately be how much stimulus is needed versus what can actually be raised. 10 year bond spreads are widening as more and more risk is being priced into the smaller countries within the EU. Now Spain, Italy and Portugal are trading between 130 basis points and 150 basis points back of German bunds.
At some point this comes back to basic economics. Spain is the prime example of an overbuilt housing market about the come crashing down.. We’ve seen overbuilt regions in Las Vegas, the inland empire of California and parts of Florida. THIS DOES NOT END WELL! There is no central currency to help in Spain so the full economic effects of the crisis lands directly on the taxpayers in Spain – not the entire Euro region. Lower spending and lower taxation revenue lead to falling credit ratings. The only way out is to gain a competitive advantage either through currency devaluation or wage reduction. Since Spain does not control its own currency the only measure it can use is wage reduction. This will not go over well and puts a country like Spain with its back against the wall. The other countries mentioned above are in a similar situation.
I believe it is only time until we start hearing discussion about the Portuguese escudo, Italian lira, Greek drakma and the Spanish peseta. If the bond spreads continue to widen watch for the rhetoric to begin.
Spent some time today looking at the European financials in detail. Getting tired of revisiting this situation but I found myself drawn to how badly these banks have been managed. Without getting into much detail and generalizing two problems jump out. First the leverage was much higher in Europe than the U.S. and second and even more alarming is the clear lack of transparency within the entire European system. There is much more pain to come.
One of the unintended consequences of the downfall of the European banking system might be the ultimate failure of the Euro to exist as a currency. The United Kingdom is well on its way to nationalizing its system and Germany and France are not far behind with bank bailouts. However the PIGS (Portugal, Italy, Greece and Spain) still have much work to do. Just how big the capital injections / fiscal stimulus will be is still not clear. The question will ultimately be how much stimulus is needed versus what can actually be raised. 10 year bond spreads are widening as more and more risk is being priced into the smaller countries within the EU. Now Spain, Italy and Portugal are trading between 130 basis points and 150 basis points back of German bunds.
At some point this comes back to basic economics. Spain is the prime example of an overbuilt housing market about the come crashing down.. We’ve seen overbuilt regions in Las Vegas, the inland empire of California and parts of Florida. THIS DOES NOT END WELL! There is no central currency to help in Spain so the full economic effects of the crisis lands directly on the taxpayers in Spain – not the entire Euro region. Lower spending and lower taxation revenue lead to falling credit ratings. The only way out is to gain a competitive advantage either through currency devaluation or wage reduction. Since Spain does not control its own currency the only measure it can use is wage reduction. This will not go over well and puts a country like Spain with its back against the wall. The other countries mentioned above are in a similar situation.
I believe it is only time until we start hearing discussion about the Portuguese escudo, Italian lira, Greek drakma and the Spanish peseta. If the bond spreads continue to widen watch for the rhetoric to begin.
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