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Saturday, June 4, 2011

Worried 2: Worldwide debt

Worldwide debt: Europe

Martin Wolf writes in the Financial Times today:

“Debt restructuring looks inevitable. Yet it is also easy to see why it would be a nightmare, particularly if, as Mr Bini Smaghi (of the European Central Bank) insists, the ECB would refuse to lend against the debt of defaulting states. In the absence of ECB support, banks would collapse. Governments would surely have to freeze bank accounts and redenominate debt in a new currency. A run from the public and private debts of every other fragile country would ensue. That would drive these countries towards a similar catastrophe. The eurozone would then unravel. The alternative would be a politically explosive operation to recycle fleeing outflows via public sector inflows.

What this means is simply this: Greece is broke. Ireland, Portugal, Italy and Spanin are in the same boat. Either the European Central Bank continues to bail out these national banks with European taxpayer money, or the Euro Zone will dissolve and all the broke banks will go under. This is Martin Wolf's view. He is universally regarded as the expert on the European Debt situation.


Gav Kael a metrics measuring outfit writes this:

“As we have highlighted in recent Dailies, our Velocity Indicator has been heading south rather rapidly. At first glance, this might appear surprising as there are few signs of stress in the financial system today: corporate spreads are decently tight, IPOs continue to roll out, and the VIX remains low."

“The answer is very simple and it is linked to the recent underperformance of banks almost everywhere. Indeed, with short rates still low everywhere, and yield curves positively sloped, we are in the phase of the cycle when banks should be outperforming. The fact that they are not has to be seen as a concern.

One of our ‘rules of thumb’ is that if banks do not manage to outperform when yield curves are steep, the market must be worried about the financial sectors’ balance sheets."

What this means is this: Despite the 7 trillion dollars the Fed has poured into the banks, none of that money if flowing through into the economy, and still the balance sheet of the banks have not been repaired. This is Gaev Kael's conclusion. They are a highly respected econometrics firm.

There is a worldwide banking crisis in full bloom. The fact that the world's central banks have been able to stem this crises temporarily with taxpayer money (your money and my money) has not cured the crisis. It's postponed it.

I don't know why people aren't more upset that their tax dollars are still going to pay bonuses of bankers who have run their banks into the ground.

But I don't believe you can fool everybody forever.

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