Dublin (and Vienna) Calling

If you think credit default swap (CDS) spreads are informative with regard to developing pressure points and issues that policymakers should focus on (or will likely spend hectic weekends dealing with), you should look at the latest CDS spreads for European banks.  The Irish story we have already flagged.  I’m also concerned that developments in East-Central Europe are starting to affect the prospects for West European banks, most notably in Austria.

My point is not that collapse is imminent.  Rather, I would suggest that now is the time for preemptive policy action – presumably at the European Union level – to head off these problems.  As we have been arguing since last October, there needs to be an integrated European-wide approach to these problems, including agreement on who receives what kind of financial support and under what circumstances.  The roles of the European Central Bank and the IMF (if any) in this context are in particular need of further explicit elaboration.

It is simply astonishing that, after all we have seen, senior European policymakers remain in substantial denial about the depth of global problems, the way in which these have direct impact on Europe, and value of thinking ahead.

Even if you are convinced that the CDS market represents pure speculative pressure, i.e., unrelated to “fundamentals”, spreads at this level are still a call for action.  In fact, in that case there is no excuse for not putting in place transparent and well-communicated fiscal policies with massive external financial support.  That should scare any speculators away.

Of course, if you believe that the CDS market is completely uninformative, there is nothing to worry about.  And there was, in retrospect, nothing to worry about when the same market pointed to growing dangers for UK mortgage lenders in fall 2007, US banks in 2007-2008, Iceland in fall 2008, and emerging markets right before the IMF started handing out big loans.

20 responses to “Dublin (and Vienna) Calling

  1. Seems like the much overdue action you suggest is necessary is now at least being discussed if nothing else…

    Reuters reports that “Germany’s Steinmeier says process has started to consider how strong Euro countries could help others.” Although apparently the “process has just begun; too early to say what kind of measures might be taken.”

  2. Indeed.
    The German Finance Minister’s change of religion earlier this week that the euro-states will indeed bail each other out, after having re-iterad his position of no bailout for the Austrians only a few days earlier, is a good sign.

    Parts of the EU is scrambling to get the house in order ahead of the G20 in April. Other parts of the EU has lost it completely (see; the Czech EU Presidency).

    Should Germany, France etc. bail out e.g. Austria, the political dynamics of the EU would shift considerably. If countries literally owe Germany etc. for not being in default, expect the bailed out countries to follow what their new owners say…..

  3. This Act may be cited as the `Let Wall Street Pay for Wall Street’s Bailout Act of 2009′.

    http://thomas.loc.gov/cgi-bin/query/z?c111:H.R.1068:

  4. It is simply astonishing that, after all we have seen, senior European policymakers remain in substantial denial about the depth of global problems . It’s nothing astonishing we simply wait that US fix few banks and restablish proper functioning of credit markets first as Europeans have just made the only mistake to invest in those derivative products that continue to be pure speculative pressures. It would be interesting to know who are the counterparts in the troubled assets of European banks. Fiscal policies are useless if you do not fix the banking system first. You pump in resources that are syphoned out by others and continue to destroy wealth (via also stock markets). This is my opinion of what I called a basic Economics of Joe the Plumber at http://mgiannini.blogspot.com/2008/12/economics-for-joe-plumber.html

  5. Hi Simon…you and Krugman are both sounding quite pessimistic today (more than usual even) and where is our call to action–I’m not a European Policymaker after all. But I think you have our full attention now. :)

    From PK’s NYT post today “…more than five to six years would be needed for the economy to converge to a longer-run path characterized by sustainable rates of output growth and unemployment and by an appropriate rate of inflation…”

    5-6 years or a lost decade? I feel like a scared viewer of a bad horror flick…”preemptive policy action”…basically means we sit around and watch the European inflation hawks do nothing until its too late. Sigh.

  6. I’m printing up a brand new form of currency and starting an alternative economy. This is easier than trying to fix the old one. Buy now, while you can still get in on the ground floor….

  7. Print money. Spend rapidly – even if it means tax rebates. Devalue dollar. Force the European Central Bank to follow suit to protect their exports.

    Inflate, or watch the US go bankrupt. Fixing the banks won’t save us now – too late for that.

  8. Saw you on Moyers. You are the only one I’ve heard that makes sense on the banks. Do you have an in to Obama/Geithner? And what about this new sceme where the hedge funds get taxpayer help. Can you explain the benefit of that? We can’t figure it out.

  9. Great post, I found the topic very interesting and helpful. thanks and keep up the good work.

  10. “Even if you are convinced that the CDS market represents pure speculative pressure, i.e., unrelated to “fundamentals”, spreads at this level are still a call for action. In fact, in that case there is no excuse for not putting in place transparent and well-communicated fiscal policies with massive external financial support. That should scare any speculators away.”.

    Simon,

    The Banking System is locked in a Terminal Decline because it is a Smoke and Mirrors Operation with no actual Created Wealth of its Own with the Perception of the System being Wealthy and in Charge of Wealth, being merely a Conspiracy to Deceive and Reduce or Elevate [depending on your view] Work and Enterprise to Ubiquitous and Globally Acceptable Paper Currency Levels of Reward. Thus can Paper Currency be easily Printed by Central Banks [which are no more than Private Entities who have seen the Perverse and Obscene Ease of Creating a Fictitious Paper Wealth for the Universal Controlling Power which has everything with a Price on it, and available for nothing more valuable that Fistsful of Dollars/Pounds/Rubles/Francs/whatever.

    As we are now all seeing and discussing, and this is the major problem for the Legacy Hosts and Drivers of the Scam nowadays [Clear Information and Breaking News is now instantly available to All once “printed” and Shared Virtually over the Internet], there is the no difficulty at all in either writing off trillions or inventing trillions but it is all done in a little secret circle/old boys network, if you like, and it has been found Unfit for Future Purpose and Catastrophically Vulnerable to Excessive Abuse, because of Flawed and Greedy Nature of Man …with the Power to Print Money for Themselves and tout it as Wealth which then has to Delivered to Others in the Circle to Realise and Release ITs Magical Powers that Control your every wish, for what can you Realistically do today and for how long before you are going to be asked for some specifically printed paper with a monetary value on its face.

    “The founder of the Rothschild dynasty, Mayer Amschel Bauer, told the secret of controlling the government of a nation over 200 years ago. He said, “Permit me to issue and control the money of a nation and I care not who makes its laws.” Get the picture? ” ….. http://www.the7thfire.com/new_world_order/final_warning/house_of_rothschild_final_warnin.htm

    The Emperor has no clothes today as Transparency cuts ITs WAI through the Spin and Dirty Deeds done Dirt Cheap against …… well, it is the whole of Humanity struggling to Survive on Nothing, in a World of Plenty thought to be Easily Controlled by Elitist Currency Regulations/Drip Feeds rather than Simple Currency Flows.

    And they still haven’t learnt their lessons and would conspire to perpetuate the Enslavement and their Artificial Created PreDominance ….. http://news.bbc.co.uk/1/hi/business/7902350.stm

    “It is well enough that people of the nation do not understand our banking and monetary system, for if they did, I believe there would be a revolution before tomorrow morning.” …. Henry Ford

    Nations and peoples are starting to understand the banking and monetary system and that does not bode well for those who are running it, should they choose not to change it, so that it helps everyone as freely as it helps them……. for they will bear the brunt of the collapse and any assault, which I imagine would be guaranteed against them for failure to mend their ways and the System.

    Where is their Intelligence and a New Course of Action whenever IT is so badly Needed and they are so Vulnerably Exposed/Naked and Alone and facing the Ire of a Raging Baying Mob Bent on Understandable Revenge for the Arrogant Ignorance shown, Perpetrating their Plights.

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  12. Liaison d'Etre

    Normally, States of crysis should have said sorry citizen, we crapped it up with our trusted people, so that’s our fault of the rulers, and you have no any banking debts now, for it’s our problem. Instead of that, they arm the police forces and take more money outta civilian “end user” pockets by the imaginary but real magnification of the cost of habitual and urgent things like bread, grain and tickets to New Zealand.

    This excess of printed paper is carried to overseas banks in the countries of so-called developing economy and buy more real stuff.

    73

    And that’s the way the rich are becoming more rich. Takes place during the chabge of the most powerful banking generations. Damn, they may produce bastards or affiliate children secretly to let the family tree grow.

    They will produce priests and pharaons of the next civilisation.

  13. Lindsay Kellock

    Re: Dublin and Vienna:
    What is your reaction to this article: An Impending Geopolitical Earthquake?, By José Miguel Alonso Trabanco? (URL of this article: http://www.globalresearch.ca/index.php?context=va&aid=12380)
    Global Research, February 21, 2009
    The following para in particular caught my eye:

    “It turns out that several European States (some with both NATO and European Union membership) are already facing sociopolitical complications that have been triggered by their severe financial and economic difficulties (lack of credit, unemployment, currency depreciation, external debt, GDP negative growth). If their situation deteriorates further, an eventual deployment of NATO troops in one or more of its members’ territory is not unconceivable at all. The official purpose would be the preservation of political stability. The unofficial (and real) goal would be to prevent NATO-friendly governments from collapsing. Iceland, Romania, Hungary, Greece, Poland and even Italy and France are in a particularly dire position. According to Der Spiegel, Britain itself (the very cradle of modern finance) is “on the brink of financial ruin”.

  14. Gizmo – I’d sign up, but have everything in Lindon Dollars right now.

    Simon – Transparency as always seems to be the key word. If speculators have the situation pegged wrong, they’ll fall off with more open discussion and planning. If they have it right, then only discussion and planning avert collapse.

  15. Pingback: Too big to save? Europe in crisis « Crisis Diary as it unfolds ….

  16. @ Lindsay Kellock 21 Feb 09 at 2:30 pm
    I believe (I was told) that NATO just had a little “security conference” in Spain, within the last 3 weeks. My informant, who was on the way to participate, has unexpectedly NOT produced any more information about the conference … which leaves me wondering whether it turned out to focus on things that cannot be repeated outside the charmed circle of NATO and EU security forces.

  17. Well Ireland is not in NATO so not sure where that leaves the tinfoil hat brigade. Maybe they will let us sink beneath the waves?
    There is still severe denial here : see http://www.independent.ie/national-news/scandal-sees-836410bn-flood-out-of-country-1649052.html exp the comments by hte finance ministry.
    10b is 5.6% of GNP btw and 3% of the bank deposit base…

  18. Lindsay Kellock

    Jim Pivonka: Your post is most interesting. The following reference is to a lengthy article on the scope of NATO (Black Sea interests), and may constitute a perfect red herring in terms of our discussion. Nevertheless, I found it interesting in itself, and perhaps an indication of a much, much broader picture of the world financial-geopolitical crisis. In case you should find the time, here is the reference: (www.globalresearch.ca) Black Sea: Pentagon’s Gateway to Three Continents and the Middle East,By Rick Rozoff
    URL of this article: http://www.globalresearch.ca/index.php?context=va&aid=12400m Global Research, February 22, 2009 (Stop Nato) I will try to find out more re: meeting in Spain.
    Brian Lucey: No, Ireland not in Nato — I may be completely off track. Interesting article. More to come …

  19. Lindsay Kellock

    Jim Pivonka: I have a trace bit of information on the meeting in Spain – but details are from private news services, such as MI, EIN and highbeam. I believe your feeling it is secret to all but a few, and most certainly concerns NATO and EU. There is a part of a mention on EIN. I can provide a few guesses, perhaps privately would be wisest.
    Brian Lucey: Ireland seems a wild mix of A-I Bank, PwC, Irish Life, China Life, Taiwan Life, and small group of very powerful players. If I understand the EU Commission position’s position on sinking states, it is: ‘Save yourselves and pull up the drawbrige’

  20. “I’m also concerned that developments in East-Central Europe are starting to affect the prospects for West European banks, most notably in Austria.”

    That definitely sent a historical shiver down my back.

    Creditanstalt, any one?