As many have been saying for a while now, the coming collapse in Europe (whatever shape it takes) is not a debt crisis per se, but a banking crisis.
Only corrupt Greece got itself in debt trouble before 2008; the rest just experienced banker-financed economic bubbles. Now that the bubbles have burst, Europeans have to decide what to do with the banks. (You know where this is headed, don't you.)
Here's economist James K. Galbraith, writing in Salon (my emphasis):
Like our own, the European banking crisis is the product of over-lending to weak borrowers, including for housing in Spain, commercial real estate in Ireland and the public sector (partly for infrastructure) in Greece. The European banks leveraged up to buy toxic American mortgages and when those collapsed they started dumping their weak sovereign bonds to buy strong ones, driving up yields and eventually forcing the whole European periphery into crisis. Greece was merely the first domino in the line.Quelle surprise as they say in, well, Europe. The Northern Europeans — Germany, France, et al — were the beneficiaries during the boom, and are determined not to let those advantages end:
In all such crises the banks’ first defense is to plead surprise – “no one could have known!” – and to blame their clients for recklessness and cheating. This is true but it obscures the fact that the bankers pushed the loans very hard while the fees were fat.
[T]he Germans reap the rents and lecture their newly indebted customers to cut wages, sell off assets, and give up their pensions, schools, universities, healthcare – much of which were second-rate to begin with. Recently the lectures have become orders, delivered by the IMF and ECB, demonstrating to Europe’s new debt peons that they no longer live in democratic states.Europe refuses to do the one thing that would end the crisis in a day (the ECB buying or at least guaranteeing the debt of troubled nations). This leaves them with (a) a rolling unsolved escalating continent-wide problem, and (b) a truly toxic solution. Read the following carefully:
[T]he ECB refuses to solve the crisis at a stroke, which it could do by buying up the weak countries’ bonds and refinancing them. ... So instead the zone has gone about creating a gigantic toxic CDO [collateralized debt obligation] called the European Financial Stability Fund, which may shortly be turned into an even more gigantic toxic CDS [credit default swap] (like AIG, they will call it “insurance”). This may defer panic at most for a little while.CDOs are the bundles of mortgage contracts that were "tranched" (sliced) on Wall Street and sold as investments. We know what happened there; most went bad and turned into junk.
CDSs are side bets between assorted investment bank and hedge fund gamblers (called "counterparties") on whether specific investments will fail or not. AIG took the "won't fail" side of the bet in most cases, collected monthly fees for providing "insurance" — then couldn't begin to pay off on that "insurance" when the CDOs it was guaranteeing collapsed in a heap, more or less all at once.
What Galbraith is saying is that the ECB is creating a situation in Europe where the underlying "bet" is the ability of Greece, Italy, Spain and Portugal (et al) to pay their debts. You can invest in the "rescue" fund, and you can place side bets for or against it. All because the ECB doesn't want to guarantee the underlying debt to begin with.
So watch that fund; it's the key to European hopes, and will be their downfall.
Someone mentioned (I think it was Matt Taibbi) that for a whole lot less than the banker bailout cost, the U.S. could have guaranteed or bought out every shaky mortgage in the country and the crisis would have been over.
Europe is facing the same choice, and has the same determination not to take it.
Galbraith's bottom line: Europe is "at the point where political structures offer no hope, and the baton stands to pass, quite soon, to the hand of resistance."
When resistance is your solution, you've got trouble. Tick, tick, tick.
GP
