Sure, there are plenty of bad omens regarding Spain’s economic fall. Ever seen 26% unemployment?

Anyways, I stay optimistic against my better nature, partly because I tell myself that its not that there aren’t options; its just that none of the options are in the least bit palatable to member state governments.


Credit: The Atlantic

The latest from The Institute of International Finance (IIF) argues that Europe would be cratered by a Greek default.

Money quote:

Here’s how the IIF breaks down the costs of a disorderly default: $498 billion to stabilize Portugal and Ireland, $459 billion to do the same for Spain and Italy, a $232 billion capital hit to the ECB, $209 billion to recapitalize European banks, and $96 billion in losses for Greek bondholders. The below chart breaks down how these figures fit into the overall picture.

Meg Greene, senior economist at Roubini Global explains the situation the Greeks are presently in.

Money quote

Is the Greek government likely to agree to transfer its fiscal sovereignty to Brussels? Some Greeks have argued that the population would be better off if Greece’s fiscal discipline were in the hands of Eurocrats rather than corrupt Greek politicians. I think it highly unlikely a bureaucrat chosen by the Eurogroup would have more success changing the political culture and Greek attitudes towards corruption, wasteful spending or tax evasion any better than the Greek government can. Regardless, the Greek government has so far indicated it is dead set against the idea. When asked about the German proposal, one Greek government source responded “there is no way we could accept such a thing.” The government released an official statement saying responsibility for fiscal policy rests solely with Greece.

Photo credit: Gero Breloer/AP Images

In the New York Review of Books this weekend, international financier George Soros gives traction to what should be a well-established fact.









Money quote:

The euro was an incomplete currency and its architects knew it. The Maastricht Treaty established a monetary union without a political union. The euro boasted a common central bank to provide liquidity, but it lacked a common treasury that would be able to deal with solvency risk in times of crisis.

As has been expected, David Cameron’s government in England declined to provide capital to assist the International Monetary Fund (IMF) and its band aid of the European Union’s ever growing financial crisis.

Money quote:

Four countries not using the single currency also pledged to add to the IMF war chest while Britain refused to commit, preventing officials from reaching the 200 billion-euro target to ease the euro area’s home-grown debt burdens. The U.K. will “define its contribution” in early 2012, euro finance ministers said in a statement after a conference call yesterday

Yglesias hopes there’s a plan B for Europe:

…the risk is that American leaders will overestimate our degree of insulation from the European banking system. You never want the people in charge to actually set off a panic by speaking too soon about hypothetical calamities, but we’d all better hope that somewhere in the basement of the Treasury Department and the Federal Reserve they’re prepping a Plan B to keep money flowing even if European finance dries up.


In the ‘Money & Company‘ section of the LA Times online is an article about US banks exposure to troubled markets in the Eurozone.

This is mostly garish copy designed to scare.
From the article:

The six biggest banks (the four named above, plus Wells Fargo and Morgan Stanley) have total net exposure of about $50 billion to the five most financially stressed markets — Greece, Ireland, Italy, Portugal and Spain. “Exposure” includes amounts on deposit, loans outstanding, securities held and other items

The immediate gut-reaction is to reach for the Tums. But then, in a majestic stroke, the Times‘ writer continues with this little gem:

…exposure averaged 0.5% of the banks’ assets and less than 9% of their so-called Tier 1 capital, Fitch said. “Overall, net exposure appears manageable but not without financial costs,” the firm said.

Half of one percent is not a great deal of worry for some of the largest banking firms in the world. Granted, a default on investments in Europe would -to put it plainly- suck really badly, but it is not the kind of leveraging that brings multinational firms. This isn’t 2008 and the clock hasn’t exactly been ticking quietly away for months. Firms all over have lessened their trading in European firms.

From the LA Times again:

The banks have hedged part of their European exposure with credit default swaps, which are insurance contracts that pay off if a debtor defaults. But swaps may not be triggered if creditors agree to voluntary losses by forgiving a portion of an issuer’s debt, which is what has happened with Greece.

So essentially, if the bank’s do get shafted by the Eurozone (an event I would find highly disturbing and unlikely) it still only amounts to less than 10% of their first tier capital, which ought to be enough to accept even a body blow like a Eurozone default.