The London press today is full of foreboding reports regarding the Eurozone crisis that suggest a very rough week ahead consistent with my position that we face a high probability of a financial crisis at least as bad as that which followed the failure of Lehman. Perhaps my pessimism is rooted in my penchant for reading European newspapers. In any event, here are the highlights (lowlights?) in no particular order:
First, The Telegraph reports that Britain faces deep political resistance to contributing some $40 billion to an effort to funnel bailout money thru the IMF. It really makes sense that Britain would not contribute because: a) they are merely EU members and not in the Eurozone; b) they have their own issues, including excessive austerity, and really cannot afford the $40 billion; and c) they would effectively be bailing out a rather economically stubborn and more backward Germany, and a downright nasty France that actually argued in public last week that Britain should be downgraded. Yet, if Britain pulls out it is game over for the Eurozone and western megabank capitalism as we know it. This accounts for the pain of British Prime Minister David Cameron, above.
Two sentences from this Telegraph report really show the sense of urgency in Britain over this crisis, in stark contrast to the public mood here in the US:
Yesterday it emerged that the Foreign Office was drawing up contingency plans to evacuate up to a million expats from Spain and Portugal in the event of a European banking crash. The planning was even said to include the nightmare scenario of thousands of penniless Britons sleeping at airports with no money to return to the UK.
Second, The Guardian reports that France faces a downgrade this week (before Christmas). As the report highlights, the whole rescue effort is premised on the AAA rating of France and Germany. So, most observers hold that this too would be game over and the end of megabank capitalism as we know it.
Third, in a second Telegraph report, it appears there is simply no way that the ECB is going to pursue the kind of massive purchase of Eurozone debt that would resolve the crisis, as I discussed here. The news is here is that Germany would essentially leave the Euro before they would allow the ECB to buy more bonds until the crisis ended. Instead, they want fiscal consolidation (austerity) until deflation takes hold and we see a vicious debt deflation downward cycle. This too could be the end of western megabank capitalism as we know it. Deflation (even when called fiscal consolidation) will not work.
Fourth, the Financial Times reports that Mario Draghi, in his first interview as ECB President, has ruled out any quantitative easing again and now speaks openly of the prospect of nations exiting the Eurozone, a prospect his predecessor declared "absurd." So no monetary fireman will rescue the Eurozone anytime soon.
Last week was bad. Fitch put a huge chunk of the Eurozone on imminent negative watch finding that: "Following the EU Summit on 9-10 December, Fitch has concluded that a 'comprehensive solution' to the eurozone crisis is technically and politically beyond reach." Ouch! Belgium suffered a two notch downgrade from Moody's. Fitch put France on negative watch. These downgrades and rumors of downgrades hurt bank capital because they trigger accounting haircuts and collateral requirements under credit derivative agreements. So, they hit the banks across the world hard and even could threaten another major financial institution failure. In Australia the banks have been warned to come up with contingency plans to deal with a Eurozone crash within 7 days. I find that disconcerting.
If we miss a big hit this week consider it an early Christmas gift.
Professor Steven A. Ramirez
Loyola University Chicago
School of Law
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