Imminent Eurozone Default: How Likely?

By Simon Johnson

The big question of the week in Europe is deceptively simple – will any countries that share the euro as their currency default on their government or bank debts in the foreseeable future?  The answer to this question determines how you regard bonds from countries such as Portugal, Spain, Italy, and Belgium.

Answering this question is not as simple as it seems, however, because it involves taking a view on three intricate issues: What exactly is the eurozone policy now on bailouts, can big eurozone countries really be bailed out if needed, and what happens to the politics of these countries and of the eurozone has a whole as pressure from the financial markets mounts?

The prevailing consensus – and definite official spin – is that over the weekend European leaders backed away from the German proposal to impose losses on creditors as a condition of future bailouts, i.e., from 2013.  The markets, in this view, should and likely will calm now; there is no immediate prospect of any kind of sovereign default or (more politely) “reprofiling” on debt, including the obligations of big banks.

But a close reading of the Eurogroup ministers’ statement from Sunday suggests quite a different interpretation.  It’s a straightforward text, just 2 ½ pages long, but it has potentially momentous consequences – as it envisages dividing future eurozone crises into two kinds.

“For countries considered solvent, on the basis of the debt sustainability analysis conducted by the [European] Commission and the IMF, in liaison with the ECB [European Central Bank], the private sector creditors would be encouraged to maintain their exposure according to international rules and fully in line with the IMF practices. In the unexpected event that a country would appear to be insolvent, the Member State has to negotiate a comprehensive restructuring plan with its private sector creditors, in line with IMF practices with a view to restoring debt sustainability. If debt sustainability can be reached through these measures, the ESM [European Stability Mechanism] may provide liquidity assistance.” (from the middle of p.2; emphasis added)

Translation: if it is decided your country is “insolvent”, rather than illiquid, then you have to restructure your debts.  But who exactly will decide?  Look at the preceding one line paragraph in that document (again on the middle of p.2) for the bombshell.

“On this basis, the Eurogroup Ministers will take a unanimous decision on providing assistance.”

In other words, any one member of the eurozone can veto a country being determined merely illiquid – thus cutting them off from cheap and endless credit (from the ECB or ESM or any window to be named later).  So now Germany effectively has a veto – as do other fiscally austere countries including Estonia (from January 1st when it becomes the 17th member of the eurozone.) 

Most likely we will witness the creation of an Austere Coalition (actually a modified Hanseatic League) of Germany, Austria, Finland, Estonia, and a few of the smaller countries.  Ending moral hazard – the prospect of soft bail out money forever – is an admirable goal.  But getting there under current conditions is going to be rocky because that new regime implies countries need to have less total debt and a longer maturity on their debt than they do now.  Transitional arrangements have not been put in place – other than the ad hoc sequential bailouts that we now see unfolding.

As for the resources needed to “bail out” countries now facing market pressure, the IMF and EU combined definitely have enough money in hand to help with Portugal and Spain – if this becomes necessary.  But they do not have enough funding currently to deal with Italy, Belgium and other larger countries (if there is a sequence of crises in the year ahead).

The IMF can, in principle, raise further resources beyond what it already has in hand; its membership (and effective owners) includes almost all countries in the world. IMF resources are shrouded in jargon; here is a relatively clear recent statement – bottom line: the IMF has no more than $1 trillion, but in terms of usable cash, the experts start to look pale as you discuss committing more than $500bn. 

But in the US this would involve a very awkward conversation with the Republican House of Representatives, among others.  Who else around the world has a stock of hard “convertible” currency sufficiently large to make a difference?  The call list for the IMF’s Managing Director is short: China, Abu Dhabi, Saudi Arabia and perhaps Singapore, Russia, and a few others.  This is not an easy scenario for anyone.

The IMF could also create its own money – known as Special Drawing Rights.  Again, check with your elected representative and the head of your central bank to see how they feel about this.  No one wants a global central bank that would operate without the prospect of proper political oversight.

The 27-member European Union could come up with further resources for itself.  But this would involve more taxes for the fiscally sound parts of the eurozone, including Germany.  And at some point soon the German taxpayer may decide enough is enough – which is exactly where the terms around the ESM come into play.

The euro is also a “reserve currency”, meaning that other countries like to use it for their precautionary savings.  Again, in principle the European Central Bank could create enough new money to enable all indebted governments to discharge their debts in full.  No one wants to contemplate the inflationary consequences of that.

In short, the larger European countries are “too big to bail”.

But do they really need a bailout or are we just looking at a “run on sovereign debt” or pure financial panic in Western Europe?

There are definitely elements of a panic at work but keep in mind one important point – such runs can become self-fulfilling, i.e., they create the exact conditions that started people worrying in the first place.

In fall 1997 in Indonesia, for example, financial markets began to worry about the collapse of the Suharto regime.  Initially, this seemed farfetched – after all Suharto had been in power for more than 30 years.  But the rapid depreciation of the rupiah put great pressure on the Indonesian corporate sector, which had borrowed heavily in dollars, and this contributed to undermining Suharto politically.  After many twists and turns, Suharto fell.  (As always, I recommend Paul Blustein’s book, The Chastening: Inside the Crisis That Rocked the Global Financial System and Humbled the IMF; Blustein is the Michael Lewis of international finance.)

The market proved itself right in the sense that dramatically lower asset prices reduced perceived legitimacy of the regime and generated a great deal of political uncertainty.  This uncertainty justified the fall in asset prices.

Could something similar happen in Europe today?

Just as for Asia in September 1997, such a sequence of events does not seem very likely, but there is no question that European domestic and regional political institutions are undergoing a severe stress test.

Whose coalitions will collapse?  Where will governments prove unable to stay the course on fiscal policy?  And, at the end of the day, whom do the Germans trust enough to provide with unlimited financial backing?

Governance in Asia did not change in 1997 – there were long-standing issues with the way companies operated (chaebol in Korea, family firms in Thailand) and with the relationship between the state and business (Suharto’s family in Indonesia).  During the boom, investors did not particularly worry about what this implied.

But when downturn comes – in Asia’s case with a rapid depreciation of currencies; in Europe’s case it is a crisis of confidence in “investment grade” debt – governance becomes a salient question for everyone who can move money.

The biggest issue today is not how Europe could be governed in some future ideal world, but rather how it is governed – and how any misgovernance will play out and be perceived as the pressures now really begin to mount.

An edited version of this post appeared this morning on the NYT.com’s Economix blog; it is used here with permission.  If you would like to reproduce the entire post, please contact the New York Times.

44 responses to “Imminent Eurozone Default: How Likely?

  1. Remind me what the benefits of having a common currency is again?

  2. Dear Professor Johnson,

    Previously you concluded Ireland was effectively insolvent, so any specific thoughts you have on the latest announcements from Europe’s leadership referenced above and Ireland’s future would be greatly appreciated.

    Also, what do you think of the following hypothesis: with respect to the ongoing Irish debt crisis (the ‘deal’ will likely be rejected by the new government early next year) will the biggest loser (besides the Irish of course) be Britain and pound sterling? More on this here:

    http://www.polycapitalist.com/2010/12/pound-sterling-biggest-loser-in.html

  3. Young Economist

    We must praise Krugman on the failure to solve the banking problems and government debts of Ireland from looking at Iceland. All European policy makers as well as American policy makers fail to meet the ultimate objective on optimal employment with price stability. They just help the banks, investors and speculators against the losses from speculative bubble. All past policies are to protect the losses of speculation. Imagine Federal Reserve spent many trillion to foreigners at zero cost but gave no money to American who faced the high interest rate, high debt burden and no jobs. What we got from many trillion help of Bernanke to foreigners is nearly 20% unemployment rate (U6) and now Bernanke expect to pump money under QE2 to speculate double oil, food and commodities prices and devalue the wealth of American. How’s crazy policy from Bernanke.

    I think all policy makers are happy to see people have no jobs but can’t stand the losses even one cent to speculators. All joblessness around the world comes from wrong policies of governments and central banks that their mouth say optimal employments and stability but their hands give the losses of public wealth and jobs into the gain of banks, speculators.

    Please enjoy speculations because at end all losses will cost the public and higher unemployment. Speculators will pay no cost at all.

    I think Ireland governments are happy with higher unempolyment with spending public deficits with 100% GDP to cover losses of banks. I disagree andI can not accept thosepolicy makers. I fight all thetime that publicmoney should support the losses of banks and private speculators and now the result is right because all past policies at end are reason of high unemployment aroung the world.

    Right mandate but wrong action. All policy makers never tell the truth. THay just say jobs growth but they put all money into banks, into Wall street, into equity markets and commodities.

  4. ECB Has to Provide Liquidity to Banks, BPI Chief Says – “Europe is Dysfunctional”

    Dec 2, 2010 7:41 AM ET

    “The European Central Bank has to provide liquidity to the region’s banking system as some lenders are struggling to fund themselves, the chief executive officer of Banco BPI SA said.
    The ECB can’t stop providing liquidity to the system at a time that Europe is dysfunctional,” Fernando Ulrich said at a conference in Lisbon today.”

    http://tinyurl.com/36h33zy

  5. The prevailing consensus – and definite official spin – is that over the weekend European leaders backed away from the German proposal to impose losses on creditors as a condition of future bailouts, i.e., from 2013. The markets, in this view, should and likely will calm now; there is no immediate prospect of any kind of sovereign default or (more politely) “reprofiling” on debt, including the obligations of big banks.

    Why are we still suffering these terrorists to live, let alone continue to steal billions through both bailouts and their continuing acts of war against our economies?

  6. What is a million to the common folks, is a cent to the speculating plutocrats. Thus, when the latter lose what are for them a few cents, their political servants, anxious to please, are all over, gathering what fell from the table of the rich, to bring it back up to their masters.
    It is not just the end of ethics, or economics, but of politics itself, that we are witnessing, and the deepest questions are not asked.
    PA

  7. DakotabornKansan

    “Advocates of capitalism are very apt to appeal to the sacred principles of liberty, which are embodied in one maxim: The fortunate must not be restrained in the exercise of tyranny over the unfortunate.” – Bertrand Russell

  8. “if the choice is chaotic global collapse or an unsavory financial rescue
    which are you going to choose
    said the doctor to the terminally depressed penniless serf
    while next doors waiting room fosters an anxious succor
    shamelessly an acute deficit disorder bankster
    bleeding of external ulcers from his greased palm
    symptons of carnage
    thus says the physician to his patients
    your both going to survive this manifested dillusional ordeal
    i’ve diagnosed your both hypochondriacs that have hyper-inflated your monetary metabolism too a heightened sense of temporary insanity
    thus the renouned specialist M.D. Hank Paulson
    the premier faux`naif of the 21st century administers what is to be the duly sought after prescription du`jour
    this illicit panacea of transient amnesia
    coated in druid youthism
    this poison pill concoction sweetened in a vupines layer
    where the cure is not of the faint of heart
    but that of a gnarled sycamore tongue
    where ones shelter is bifurcated upon solace and greed” earle

  9. “And at some point soon the German taxpayer may decide enough is enough”.
    Yes, and then there’s the 800 lb Gorilla in the room, namely the German Constitutional Court, who still did not rule on the various legal challenges to the bailouts. I suspect they have given chancellor Merkel some time to prove by new agreements/clarifications , that the former are not violating German law and previous Euroland agreements (as they undoubtedly are).
    But at some point the court must decide.
    Don’t take its acceptance of the current shenanigans for granted.

  10. Capital infusions might work to lessen some depression effects in production-based economies (China?), but in consumption-based economies such as the U.S. capital infusions must be supplied to consumers, not producers to produce a measurable result. In support of this idea, visit the FDIC website where “Cash Balances” are reported summarily as increasing approximately $680 mil from year-end 2007 to year-end 2008. Almost dollar for dollar the amount of the initial bailout. Had 300 million Americans each received $2, they would have spent it (given little to no incentive to save it given returns at the time) and thus infused the economy as a whole. Instead, banks held the money and willingly withheld the opportunities for growth from the rest of the economy.
    Ironically, in a game of maximizing “profits” between consumers and producers, ultimately both will choose the collectively worse outcome in the existing “free market/capitalist” system even though there exists a more amenable and balanced outcome for both players. The government should act as the arbiter between the two players, creating incentives and laws to encourage each side to select the outcome that benefits the most, not the least. Unfortunately all have been derelict in their duties.

  11. I’m surprised – the list of questions you present leaves out the biggest one:

    “What is the role of the ECB in funding bailouts?”

    The current EU situation is, much like the US, the worst of all possible worlds. The hypocrisy is rich (as in the US), and the goals of the elite are clear:

    1) Make sure the financial institutions do not suffer losses
    2) Keep the currency strong, because the assets of the financial institutions are denominated in the currency

    The only ‘solution’ involves burdening taxpayers with debt, but the markets challenge this because they do not expect that debt to be paid back in the future. Currency, really, can be viewed as debt (as a claim on the future tax base of a nation, which is dependent on national income). So the challenge becomes convincing most people in the world that the debt obligations are sustainable long enough for the currency owners to convert their currency holdings into hard asset holdings.

    Of course, hard assets may only be valuable to the degree demand for them exists, so the world seems caught between cyclical commodity bubbles and currency crises, because it’s unable to lay out a plan for meeting obligations that anyone perceives as sustainable.

    Europe, less so than most.

    Meanwhile, we have the option of SDRs – which, the more I think about it, is even worse than the ECB. The problem with austerian independent central banks appears to be they are more concerned with the credibility of the paper than with the long term capacity of the underlying assets (that is, the economy which provides the tax base) to make good the paper in the future.

    I do NOT BELIEVE FOR A SECOND that a default of Ireland would destroy the international monetary system IF the ECB and Fed credibly signalled their intent to compensate for currency flight with sufficient asset purchasing programs. NOT FOR A SECOND. But this would devalue their precious currency, and force them to admit it isn’t quite as valuable as they want to think because they like to live in an illusory world where the currency can exist separately from the underlying asset (the claim on future tax revenue). The governments, meanwhile, have no guts… or, indeed, have been intellectually captured by austerians who simultaneously hate central banks but are enacting PRECISELY the policies that CBs want.

    All in all, a comically farcical game of chicken.

  12. Wall Street Banks In Talks To Settle SEC Lawsuit Over CDOs

    12- 2-10 09:36 AM – excerpt

    “As the government hunts for conflicts of interest at Wall Street banks that peddled investments which contributed to the worst financial collapse since the Great Depression, those banks are reportedly near settlement.

    The SEC is looking at banks such as Citigroup, JPMorgan Chase and Morgan Stanley, to determine whether they knew crucial information that they didn’t tell investors, when they sold complicated mortgage-based securities. But those banks and their regulators have begun talks that could lead to out-of-court settlements, agreements that would relieve the banks of an enormous legal headache, the Wall Street Journal reports.
    Goldman Sachs reached a similar deal in July, after the SEC said the bank sold investors a set of securities that had been partially selected by a hedge fund (and Goldman client) that was betting against it.

    Goldman paid $550 million, a record sum, but peanuts for a bank that earned $13.4 billion last year.”

    http://www.huffingtonpost.com/2010/12/02/wall-street-settlement_n_790888.html

  13. Agreed. The situation appears FUBAR.

    http://en.wikipedia.org/wiki/FUBAR

  14. CBS from the West

    Well, it _would be_ comical if we weren’t all standing here holding the bag.

  15. One problem is to distinguish a debt load that cannot be repaid from one that cannot be comfortably repaid. The discipline for those inclinced to renege on their debts is the prospect of higher borrowing costs in future. The discipline thus imparted depends not only on the size of the interest spread that would be imposed after default, but on the debtor’s need for new borrowing.

    The European monetary union reduced borrowing spreads for some members (Greece, Spain, Italy). Perhaps now markets will realize there were reasons for the pre-union spreads and that the union’s structure did not eliminate these reasons – it just succeeded in hiding them and fooling the markets.

  16. theotherguydidit

    StatsGuy

    I agree a default by Ireland would not destroy the international monetary system. That said, even without the ECB or FED overtly signaling underwriting agreements, I don’t see that big a risk to Ireland. There is enough political support to aid the new Irish government now forming and it would be in many bank’s interests to do so.

    The possibility of another Iceland sends shivers down the back of banker and government alike. How many more hits to the debt structure, that they depend on, will it take before it cracks is another question. The ECB and FED don’t mind playing with currency valuations when it suits them. Fin-Mins all support some one’s strong currency, mean while bankers swap paper or digits to cover their positions. Or simply lie about stress tests.

    The worry I see is the governments straining against the interests of the people that elected them. The young feel there is little to loose, the middle is worn out trying to make ends met, and the old are fearful they will be cast aside.

    Not the makings for a good democracy. Without the authority of the governments, the banks are done. With rebelion waiting in wings, government’s will revert to what they always have, repression or war.

    Truely a game of chicken.

  17. I like that quote. But lets be honest, they are also allowed to exercise in Communist China . the one party states of the Middle East, and Russia which is effect now a one party state.

  18. I just need to get one simple thing from Prof. Johnson. His personal portfolio for his retirement funds. I am a bit confused right now.

  19. Dr Johnson

    As someone intimate familiar with the events in Indonesia, Thailand and Korea from 1996, I am disappointed to see you using a “dog whistle” association between the current events in Europe and what happened there. The commonality may have been vulnerability and unsustainability of certain situations and practices (Suharto’s loss of credibility vs the local commercial elite was an important factor that would always have caused capital flight etc) but in all these cases the locals got the better of the foreigners in the end. And of course the locals were as busy creating “momentum” as the foreigners.

    Anyway, you made up for it by showing the Hansa storythrough they eyes of a someone academically affiliated with the Bundeswehr. Entertaining piece, but what is the dog whistle there? The Huns will be coming at you for not wanting to be part of the Hansa? Or, this time we will do it right? Or: look these guys have a long tradition of being ineffective empire builders. Anyway, What disappointed me there is that you omitted in your little list of countries joining Germany, The Netherlands, and economy larger than Austria, Finland etc combined and probably Germany’s closest economic ally.

    There is a perfectly good explanation for the slow pace of EUR response to the crises: if necessary (deemed necessary by the core countries) it is always possible to tinker with the ECB mandate (like the Bundesbank was temporarily taken out of its Geldmenge policy during reunification) and then the liquidity crises will be no problem, assuming that the various national governments are prepared to provide sufficient collateral to their banks (this is what the Irish should have done instead of guaranteeing the wholesale liabilities as well as the retail ones).

    They could for instance inject state bonds into undercapitalized banks (as you may have witnessed in Indonesia). For Spain this would probably be enough (the big private banks should not require support, except an undertaking on the part of the gvt that they will not let the recapitalized ones compete unfairly, as the EU was prepared to accept in the Belgian and Dutch cases of bank rescue a few years ago (after the reckless hostile acquisition of Dutch ABN AMRO by RBS, Fortis and Santander).

    I would expect that that would halt further contagion, since the amounts necessary to move the markets in Spanish and French treasuries against coordinated intervention by those gvts through friendly financials would be far too large for funds. Of course priority should be given now to overcome the longstanding objections of the UK gvt to the various pending proposals that would , inter alia, result in far greater transparency of fixed income trading (and CDS) in Europe. Maybe that would show us what is really driving those spreads.

    Countries with unsustainable positions (where even properly structured extraction capacity falls short of debt service requirements) should be allowed to exit these arrangements (and preferably the EU, in order to avoid moral hazard) or, preferably, receive development assistance and FDI stimulating privileges (like the Irish self-service ones)

    Belgium is unique case where (like in Indonesia in 1996, apparent financial stress combines with political discontinuity risk) . Given it’s location, it is unlikely that it would be left to fend for itself and of course the majority of the people are in Flanders, and area if independent, would have been part of the Germanic League under formation and probably very keen on austerity measures.

  20. Bayard Waterbury

    Simon, interesting that you would chose to publish this article at the end of the very week in which the FED revealed what it had done to prop up both the American banks and corporations AND many in Europe over the past two years. The FED could, in theory, provide nearly endless funding to the IMF if it determined that a crisis in the eurozone would spread to American banks and corporations (there seems little doubt that this would happen, if such occurs). Remember that the FED, not a part of our US government, has independent authority to support our banking system by whatever means necessary. In fact, by this week’s revelations, it did this (including banks and others overseas) to the tune of $3 Trillion plus. Of course, continuous bailouts from any source just make any future catastrophe undergo substantial magification, but then, to date, the prevailing wisdom is to hand out the funds and pray.

    If what we see is not a strong move by the “globalists” among us, what is. We have been awaiting this eventuality, and, now, it seems more likely than ever that there will be some kind of move to a single international currency. That’s my take, but then, I’m not an economics PHD, so what do I know?

  21. Why must we have sociopathic economic policies that impose deprivations on anyone while fattening others?

  22. Simon, could you be more clear about the timing of decisions that a country “would appear to be insolvent” as viewed by the Eurogroup Ministers. Is this in effect currently, or is it after 2011 or 2013? If this power is in effect currently, when do the Ministers meet on this subject, and who advises these folks on this subject – EC economists, their national economists, both, others? Thanks for all you do.

  23. Am I incorrect in pointing out that essentially while we unwilling to declare simple banks insolvent, we are comfortable with shifting their debts to the government and then perhaps declaring the entire government insolvent?

    If I am correct, does it get any more twisted? We’d rather preserve a private entity, shifting the burden to the people, and then essentially dissolve the finances of the country rather than to dissolve the finances of the bank (or banks)?

    When did corporations become more important than the states that hold them?

    Don’t answer that, I know it’s a dumb question.

  24. Because God is dead.

  25. Hmm … just what was it that the NYT cut out of Dr Johnson’s article … and why?

  26. “The young feel there is little to loose, the middle is worn out trying to make ends met, and the old are fearful they will be cast aside.”

    That is pretty much accurate. Two complications:

    1) Our infrastructure is misaligned to sustainable needs – it’s built for short term, which means it’s costly to maintain (not ideal for aging population). Think big houses, poorly built.

    2) The generational gap coexists with distributional issues. The middle/older groups have severe inequities, since some segments benefited while others lost.

    So the choices are: let the poor old suffer, force the rich old (accumulated wealth) to pay for the poor old, or make the working middle pay for it all.

    Look at the demographics of the vote, and you can see the answer. At some point, however, GenY will hit outnumber boomers at the polls, and that will be final curtain.

    When people talk about “debt overhang”, what they really mean is that the balance of future obligations cannot be met by anticipated future supply. Something has to give, unless you believe that a miracle will happen. On the one hand, we have excess capacity (that’s Krugman’s argument). On the other, we have massive demographic / environmental / infrastructure / natural resource issues.

    The ideal solution would be to redirect short term excess capacity to developing long term sustainable infrastructure. That hope is gone. It died on the vine with Team Obama’s incompetence and our political corruption.

    Instead, we got a false choice between wasteful “stimulus” and wasteful unemployment, and the window – politically, but also economically (observe commodity prices), is probably closed.

  27. Follow the link and find out.

    Clue: Nothing substantial.

  28. lol @ Scathew’s question. Another question is what, if anything, can be done to reverse the trend of nationalizing private sector liabilities? Frankly, short of a “people power” type revolt, I do not see how we can get this horse back in the gates. In fact, it may very well be too late beacause it is now clear that nearly ALL developed world governments are seriously indebted and teetering on the edge of default. In fact, I know I wouldnt be wrong to say that we are just one default away from a series of default. Dominoes anyone?

  29. When I read about bail out plans that hinge on the assumption that Greece or Italy or whomever will have a quick recovery in the medium term, I become more and more convinced that we’d do well with a jaded, cynical technocracy.

    Why do we always delay the hard decisions to the point that they are geometrically harder based on these silly hopes of recoveries meeting positive expectations. How often are recoveries robust? It seems like they are always anemic an we would do better to just assume they will be anemic.

    My gut says the answer is because there are usually ways in which assuming the best allows rich people to eke out some more money for even longer rather than accounting for their mistakes.

  30. I’m always surprised that the generational issues have not gotten more attention. Happy to see it get some airplay here

  31. @ freeoptionspicks___The best I can explain is using a twisted abstract analogy: The Internet and Globalization have made the world flat (astrophysicist and cosmostologist now theorize the universe is a flat plane?) again, period? These hubris evolving globalist anthropoid’s have regurgitated assiduous lies and spewed enough viral hyperbole B***S*** they’ve actually come to believe it themselves! Yes indeed…the collective oligarchy have taken a bite out of their own poison apple themselves, this could, and very well should…eventually implode their diabolical dromedary stomach’s for a well deserving civilized yet cannibalized vuture’s late night feast du`jour!

  32. It is painfully apparent that large hedge fund managers and banks are now able to manipulate governments, with the aim of making money for their customers.
    The U.S. and now the E.U. governments it appears are going to bow down before them. There are a number of reasons for this. I will list them in order of importance.
    1. The governments are supposed to represent the needs of the majority of their people. However historically and currently in many countries they represent the rich and powerful people within that country more than the poor and uninfluential people.
    These are the people who are the customers of the large banks and hedgefunds. These are also the people who own the mainstream media.
    2. I think the increasing age of the (voting) population has a part to play here. The average age of a U.S. voter is 49. A 49 year old has savings invested and are customers of the system that is forcing governments to unfairly refund them their losses. They are naturally desperate about losses to their investments as they now expect to live to 90 and are not thinking about fairness. They are prepared to sacrifice their childrens prosperity as they are aware that their children will not have them in their homes or take care of them as well as they would like in old age.
    3. The Pesidents of large hedge funds and Banks have a clear common interest – profit, and are able to co-operate well and make quick decisions when needed.

  33. Two trends that I think are ignored in the financial crisis are
    1. The fact that the developed worlds population are living for about 30 years after they retire.
    2. The fact that there has been a large cultural shift in families caring for their parents in the developed world. While many families live with and aid their elderly parents, many more ‘stick’ them in nursing homes. In the developing world almost every family still live with their elderly parents.

    The knock on effects of this have been
    1. Over 50 year olds are very slow to transfer inheritances to their adult children in the developed world.
    2. Many over 50 year olds or hedge funds on their behalf invested in other properties as a ‘safe’ pension investment making property unaffordable for their adult children. Incidently as house prices fell 50% their pension fund fell 50%. Governments have been trying everything to increase houses prices again including buying up the housing stock from the banks.
    3. Many over 50 year olds or hedge funds on their behalf invested in bonds as a ‘safe’ pension invesment. Governments have been trying everything not to see any losses on these bond investments, including taking out massive debts on behalf of the people to repay these bonds.

    There are some more points I would like to make here.
    1. In my opinion the younger generation of 0 -33 year olds are and have been treated unfairly by the older voting population in their push for pension funds. They are building up huge debt to protect their investments and standard of living which that generation will have to repay.
    2. The younger generation may not be able to repay these massive debts due to knock on effects such as lower economic growth. In this case everybody loses.

    The challenges to change this situation.
    1. We live in a democracy. In a democracy the majority rule. As that majority gets older the younger have less of a voice. Minorites may not be properly represented.
    2. The rich and powerfull have a strong influence on politicans through lobbying.

    Possible solutions??

  34. This is the best advice from the Gospel of Luke Chapter 12.

    Someone in the crowd said to him, “Teacher, tell my brother to divide the inheritance with me.”

    14Jesus replied, “Man, who appointed me a judge or an arbiter between you?” 15Then he said to them, “Watch out! Be on your guard against all kinds of greed; a man’s life does not consist in the abundance of his possessions.”

    29And do not set your heart on what you will eat or drink; do not worry about it. 30For the pagan world runs after all such things, and your Father knows that you need them. 31But seek his kingdom, and these things will be given to you as well.

  35. Funds are not big enough to do that.

  36. You allude to “how any misgovernance will play out and be perceived as the pressures now really begin to mount,” but truth is a tsunami of misgovernance is well formed and the denial of its existence only finds starving children braving a strangely receding shoreline to pick up exposed fish oblivious to the destructive wall of money about to crush them and everything for miles around. There is no possible shared sacrifice that can stop such a thing. Only a move to higher ground will do. Such is where a Hamiltonian credit system put in place by global treaty arrangements offers capacity to flank the present, bankrupt, grossly misgoverned arrangement, so that it might then wither from the vine and die, much like the Holland Tulip Bubble before it.

  37. Thanks for you reply. PIMCO fund has $1.3 trillion dollars, was a major CDC seller/insurer on Lehman bonds and is a main buyer of European Sovergn Bonds/Debt.

  38. theotherguydidit

    chris

    Pity the poor children? Hardly! The “Me” generation spoiled the 0-33’s into the belief they are special and deserve better.

    The Me generation did those that followed a great dis-service. The Me’s are slow learner’s. I attribute it to all the drugs and sex from our hippie days.

    Mostly, we see the error in our assumption that our life would be better and that of our children too. If by putting in the extra hours, paying our taxes, investing for the future, keeping up with the Jones’s, stressing education and promoting an ideal of entitlement to all the world has to offer to the generations that followed is a fallacy.

    It is a struggle. It was for our parents. It is for us.

    The up side, the Me generation ended the DRAFT. If we only did one thing right, that was the one that counts.

  39. theotherguydidit

    That’s really the question isn’t it.

    Why have they not redirected excess capacity into long term sustainable infrastructure?

    We have the need. We have the model. We have the capacity.

    We lack the leadership.

    With the amount of money spent, we was robbed!

  40. I believe there will be a “run on sovereign debt”, excuted by the bond vigilantes continually calling sovereign and corporate interest rates higher … and by the currency vigilantes effectively selling the Euro, the Swedish Krona, the New Zealand Dollar and others lower.

    The European Financial Institutions, having purchased sovereign debt are inexorably intertwined with the sovereign status and sovereign debt of the periphery nations. The banks are one and the same with the nations and their debt. When one looks at the European Banks, one is seeing the combined sovereign debt of Portugal, Italy, Ireland, Greece and Spain.

    If there be a currency war, and I believe there is one commenced on November 5, 2010, on these sovereign states, then there is also a financial stock war on the European Financial Institutions, and a corporate bond war on the debt these banks hold.

    To document just part of the bank-sovereign symbiosis Business Insider presents the Evolution Securities chart showing Barclays, Deutsche Bank, and BNP have large estimated exposures to Spanish sovereign debt as of May 16, 2010.

    Banco Santender, STD, is under great selling pressure as Spain’s Casas, banks owned and operated by the Roman Catholic Church, extended real estate loans to build properties for which there was no demand. Business Insider reports Spain is now a walking dead economy: “Spain now has the highest unemployment rate in the entire European Union. More than 20 percent of working age Spaniards are unemployed. The total of all public and private debt in Spain has reached 270 percent of GDP. There are 1.6 million unsold properties in Spain. That is six times the level per capita in the United States. Considering how bad the U.S. real estate market is, that statistic is incredibly alarming.” Banco Santander will not be able to withstand the market place selling pressure.

    You write: When downturn comes … governance becomes a salient question for everyone who can move money. The biggest issue today is not how Europe could be governed in some future ideal world, but rather how it is governed – and how any misgovernance will play out and be perceived as the pressures now really begin to mount.

    I reply: Governance will come out of Europe’s Core, that is out of Brussels, and Frankfurt and Basle, with a Sovereign, that is a Chancellor, a leader like Herman van Rompuy, as well as a Seignior, an old English word meaning top dog banker who takes a cut, a minister such Olli Rehn, or Jean-Claude Trichet, rising to establish strong economic governance like the world has never seen, to deal with the global banking crisis. This as the currency traders will likely continue to sell off the major currencies, DBV, as well as the emerging market currencies, CEW, in an ongoing global currency war against the world central bankers.

    Leadership for reconstitution of the global economy will come from Germany, as Germany is the real power force in a revived Roman Empire, and is currently taking the lead in an attempt to find a way out of Europe’s sovereign debt crises. Ambrose Evans Pritchard commented, on May 2, 2010, in the Telegraph, documenting the power of Germany in words reminiscent of Margaret Thatcher: “If the aim of Helmut Kohl and Francois Mitterrand at Maastricht was to tie down a ‘European Germany’ with the silken chords of emu, they failed. Monetary union has delivered a ‘German Europe’ after all. And he continues, We now know the answer to Henry Kissinger’s question: “Who do I call if I want to call Europe?” Only one person matters,The Chancellor of Germany.” …. And also Arthur Beesley in October 20, 2010, Irish Times article Sarkozy And Merkel Union Just Too Powerful To Ignore documents the rising power Germany in the EU.

    Germany has always had an enduring desire for leadership within Europe. It was one of six signatory nations to the Treaties of Rome which established the Eurozone on March 25, 1957. Historian Juan Carlos Ocana writes: These Treaties being the European Economic Community, EEC, Treaty, and the European Atomic Energy Community Treaty. The EEC affirmed in its preamble that signatory States were “determined to lay the foundations of an ever closer union among the peoples of Europe.” In this way, the member States specifically affirmed the political objective of a progressive political integration. The EEC was colloquially known as “Common Market”. The member countries agreed to dismantle all tariff barriers over a 12-year transitional period.” The signatories of the historic agreement were Christian Pineau on behalf of France, Joseph Luns from the Netherlands, Pauh Henri Spaak from Belgium, Joseph Bech from from Luxemburg, Antonio Segni from Italy, and Konrad Adenauer from the Federal Republic of Germany. The Treaties were ratified by National Parliaments over the following months and came into force on 1st January 1958.

    The Seignior will establish fiscal sovereignty, unified regulation banking of globally as described in the James Politi and Gillian Tett Financial Times article NY Fed Chief In Push For Global Bank Framework, a common Eurozone Treasury, both credit and fiscal seigniorage, and enforce austerity resulting in internal devaluation. In the globally integrated future financial world, services from companies such as ACI Worldwide, Inc, ACIW, should be in great demand.

    Its very reasonable to believe that out of the soon coming implosion of European Banking, that Jean-Claude Trichet could rise to rule in Europe as he frequently stated a need for strong economic governance. France 24 International News in article Trichet Calls For United EU At The IMF reported on September 4, 2010: European Central Bank chief Jean-Claude Trichet called for Europe to hold a united position on reform in the International Monetary Fund. “I would urge the Europeans to have a united position,” Trichet said when asked about the possibility of cutting the number of EU seats at the IMF. Speaking at a press conference at the Forum Ambrosetti, a political and economic gathering in northern Italy, Trichet said a common EU position on IMF reform is “very important for global governance”.

    And in address Global Governance Today, made before the Council on Foreign Relations, CFR, on April 26, 2010, Mr. Trichet called for a new financial state-of-being saying: “For the good and appropriate functioning of global finance it is extremely important that we, in this new ownership of global governance, have — particularly on both sides of the Atlantic — the implementation of the same rules in the same fashion.”

    Forbes reports on December 4, 2010 ECB’s Trichet To Receive 2011 Charlemagne Prize. Wikipedia relates that the Charlemagne Prize (German: Karlspreis; full name originally Internationaler Karlspreis der Stadt Aachen, International Charlemagne Prize of the City of Aachen, since 1988 Internationaler Karlspreis zu Aachen, International Charlemagne Prize of Aachen) is one of the most prestigious European prizes. It has been awarded once a year since 1950 by the German city of Aachen to people who contributed to the ideals upon which it has been founded. It commemorates Charlemagne, ruler of the Frankish Empire and founder of what became the Holy Roman Empire, who resided and is buried at Aachen. Traditionally the award is given to the recipient on the Ascension holiday in a ceremony in the town hall of Aachen.

  41. theotherguydidit

    theyenguy

    I had a conversation about six months ago where the return of the Holy Roman Empire was the conclusion of how history wants to repeat itself given the economic/political fall out from the New American Depression.

    And there, the dissenter’s thought wild speculation and tin hats were the best we could come up with at a that suggestion.

  42. Yes and Yes. That was the mandate in 2008, and it was ignored. Why? Corruption? Incompetence? Ideology? Personal ideology of Larry Summers? I suspect that in a hundred years, we won’t be much closer to the answer than we are today.

  43. Nicola Matthews

    There are really only two scenarios facing the Eurozone in the future. One, operate as a lender of last resort to nations facing currency default. In the long run this would require a re-structuring of the Maastricht treaty. Two, dissolution. Because the nations in the Eurozone are equivalent to states in the US, i.e. they are not sovereign in their own currency, they will always be heavily reliant upon the ECB. There is no other way to reconcile this except with the two scenarios given.

  44. Living in Germany, I witness the cultural change taking place here whereby Germans are again proud of being Germans and are not worried anymore to defend loud and clear their national interest.

    Clearly the decision makers here will be under a lot of pressure not to bail out the Euro at any costs.

    Question to be answered is whether the collapse of the Euro would cost more or less to the German tax payers as a bailout?

    I read that “Again, in principle the European Central Bank could create enough new money to enable all indebted governments to discharge their debts in full. No one wants to contemplate the inflationary consequences of that.”

    But looking at the Fed, this is exactly what they did and I still fail to see more than 1 year later the 10 or 20 % inflation that was promised… .

    This will be in my view the only way out of the crisis as such.

    Over the long term, of course the “too big to fail” and running public deficits issues will have to be addressed structurally.