Staging the European Crisis and the Phantom of Rescue

September 13th, 2011
in econ_news

fear Econintersect: Some of the big news Monday (Sept. 12) was a meeting that apparently took place last week when China Investment Corps Chairman Lou Jiwei met in Rome with Guilio Tremonti, Italy’s finance minister. Apparently Italy is in talks with China to sell some of their government bonds to the flush crowd in Beijing. Some Italian equity assets may also be for sale, according to Mark Gongloff in The Wall Street Journal. The Gongloff article cites a number of other sources that indicate there may not be any serious negotiations underway, but when the news broke the New York stock market rallied strongly before fading. A late session push saw the day end in the green, the only time during the day for many averages.

Follow up:

The Chinese rescue aside, Mark Dow, a former U.S. Treasury and IMF economist writing for Reuters, says basically that (paraphrased) it’s time to go big or go home for Europe. He writes:

…the cancer is metastasizing at an ever-accelerating rate. Italy, Spain and even France are now genuinely at risk. Failure to stem the tide now could well undermine faith in the modern global capitalist system — a system already stretched by political polarization and income inequality — with potentially massive social implications. In short: It’s go time.

Dow says it is time to do the unthinkable and address the solvency issue head-on. The efforts to date have been reacting as if the problem was a liquidity issue, according to Dow. It is not a liquidity issue and austerity cannot solve what needs to be addressed with major sovereign write downs and economic growth. Bottom line for Dow?

1. Recapitalize the banks. Dow uses the term “shock and awe.”
2. Deep haircuts for Greece and Portugal, and possibly Ireland, with expulsion from the euro.
3. The ECB (European Central Bank) must unleash the unlimited balance sheet to support Spain, Italy and probably France.

A report from Bloomberg indicates that Mark Dow’s prescription could be coming closer to reality. Simon Kennedy and Brian Parkin wrote:

After almost two years of fighting to contain the region’s debt crisis and providing the biggest share of three European bailouts, Chancellor Angela Merkel is laying the ground for what markets say is almost a sure thing: a Greek default.

“It feels like Germany is preparing itself for a debt default,” Jacques Cailloux, chief European economist at Royal Bank of Scotland Group Plc in London, said in an interview. “Fatigue is setting in. Germany could be a first mover or other countries could be preparing too.”

So, at what stage is the European crisis?  The following graphic displays the cycle if fear, hope and greed from Raymond James.


The GEI News editor suggests that Europe is somewhere between denial and fear and will soon move to desperation. If the Bloomberg story is accurate capitulation could follow immediately. Could Europe actually skip outright panic?

Maybe not, according to an article by Herb Lash (Reuters) out Monday night, posted at Yahoo News. From that news report:

The governor of the Bank of France, Christian Noyer, later said French banks have no liquidity or solvency problems and that they can withstand any crisis event in Greece.

Maybe Europe is still in the denial stage after all, in spite of the hopeful thoughts of Mark Dow.

MIT economics professor and former IMF chief economist Simon Johnson says that the recovery from the global credit glut and financial crisis will be very long (Bloomberg Op Ed). So if the passage through panic and capitulation is rapid and Johnson’s assessment is correct, Despondency and Depression may be around for a very long time. Of course, during the dreaded D’s the maximum in Opportunity will be presented for those with the intelligence and courage to search it out.

Sources: The Wall Street Journal, Reuters (Mark Dow), Bloomberg, Yahoo News and Raymond James

Hat tip for some of the sources to Barry Ritholtz, The Big PictureMonday Afternoon Reads

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