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How dependent and vulnerable are we today regarding the European debt crisis?

By : Ziad K. Abdelnour| 19 September 2011
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It is clear to everyone today that Europe is in a deep debt crisis and that the multinational bailout of European banks won’t do much.

After UBS announced it had lost $2 billion due to an alleged rogue trader, the world’s major central banks stepped into the void created by the euro zone debt crisis.

The Federal Reserve and the European Central Bank, in co-ordination with the Bank of England, Swiss National Bank and Bank of Japan recently announced a plan to offer three-month dollar loans to commercial banks in order to avoid a liquidity crisis in the euro zone banking system.

While liquidity is not as big a problem as it was in late 2008 following the collapse of Lehman Brothers, I believe solvency is.

In fact, even if banks in the euro-zone have less of a liquidity problem on their hands today than they did in late 2008, they have a greater solvency problem. This is reflected in the fact that the cost of insuring against a default by the banks is today much higher.

Policymakers’ response to the financial crisis was to recapitalize the banks and transfer risk to the public sector. This is now coming back to haunt the banks, as they hold so much government debt and the governments themselves are in no position to offer renewed support.

Hence, I expect a further near- to medium-term escalation of the euro zone crisis involving the default of a sovereign in, and the possible departure from monetary union of, at least one country.

By the same token, I guess the Fed is now going to be taking huge piles of your money and loaning it to commercial banks in Europe. The Congress cannot overrule this decision. Neither can Barack Obama. Because it has so much power and there are basically no significant “checks and balances” on the Federal Reserve. If you don’t like the fact that the Federal Reserve is racing in to help big foreign banks survive the European debt crisis that is just too bad. The Federal Reserve pretty much gets to do whatever it wants to do, and the folks over at the Fed simply do not care whether you like that or not.

The Federal Reserve and other major central banks around the world decided that lending big European banks gigantic piles of dollars would be a good idea, so they are just doing it.

So how much money is going to be loaned out?

Well, it seems that big European banks are going to be able to borrow ‘any amount’ of money in three separate auctions in October, November and December. Banks will have to put up collateral, or security, to tap the emergency funds.

But it’s not just Europe …U.S banks and money market funds are exposed to the meltdown in Europe as well. So the meltdown in Europe could and will most probably cause real problems in the U.S

Indeed, if Wall Street insured much of the European debt through derivatives contracts, the fallout could be amplified many times over.

The less conservative figure, the gross exposure, is $78.7 billion for Greece, according to Markit. And there are many other types of contracts, like about $44 billion in other guarantees tied to Greece, according to the Bank of International Settlements. The gross exposure of the five most financially pressed European Union countries — Portugal, Italy, Ireland, Greece and Spain — is about $616 billion. And the broader figure on all derivatives from those countries is unknown.

According to Matt Taibbi, what caused the European crisis wasn’t a rogue trader, but a rogue bank … or more accurately, all big banks have gone rogue.

As such, the European crisis continues to worsen, just as the U.S. economy is worsening because no amount of band-aids will cure a cancer (i.e.: fraud) that is not dealt with immediately.

The government is deploying all of its equipment to rescue the economy…..But rather than fixing the US economy, the equipment is just getting swallowed up.


Ben Bernanke’s answer to all of the water running out of the bathtub (high unemployment, falling home prices, slow growth, etc.) is to pour more and more water (easy money) into the tub (quantitative easing, zero percent interest rates, etc.)

Similarly, Geithner and Obama and Congress can throw all of the money at the giant banks through direct and hidden bailouts that they like, but – until the hole is plugged – nothing they do will work.

The water will just keep running away.

What’s the hole that is swallowing up the economy? The failure to follow the rule of law.

I strongly believe No investor – or taxpayer – in Europe or America (or any other part of the world) will be safe until the rule of law is restored and it hasn’t been yet. This will not only lead to the fall of Obama no matter how much money he raises for his Presidential campaign but will put this country into much deeper trouble….Mark my words.

Your feedback is as always greatly appreciated.

Thanks much for your consideration.


  1. Joanna HuangJoanna Huang

    Can some American/European private money flow into Asia such as China to diversify the currency/solvency risk? Say by investing some mining/resources HK listed companies? So far it is the safest way to convert USD to RMB investments and expect to convert them back in two to three years window. Thank you.

  2. Roger AklRoger Akl

    The situation in the Western world seems so disastrous that there would be a possibility of a third world war. I don’t think there is another way to save our economies and, when the leaders are confronted with unsolvable problems, they tend to “fuir en avant” (flee forward) like the French say.

  3. RomanRoman

    The solution is for all of Europe to move away from the nanny state and bite the bullet on some dramatic austerity measures… they should let Greece default to illustrate to the rest of Europe that the entitlement mentality needs to end… they have been in a state of denial for decades… it is just coming to a head.

  4. Ricky Muir-Simpson- ScotlandRicky Muir-Simpson- Scotland

    The real challenge facing the Euro area is one of multiple political agendas and the inability / refusal to reconcile those. The stronger Northern economies do not want to see their taxpayers’ cash going to support the profligate Southern economies. The Italians, and to a lesser extent, the French cannot bring themselves to recognise / accept that the Euro is a massively fractured currency as any resultant realistic changes to the “management” (sic) of their economies would seriously conflict with deeply engrained socio economic / political principles even tho’ the evidence highlights that change MUST happen. The European Commission is displaying even less acceptance of reality enhanced by appalling judgement which only will prolong the agony. Results : All Euro Zone Governments,especially the the happy spenders, will have to accept, however reluctantly, that “he who has the gold makes the rules” e.g. international financial markets. Second,absent the complete disintegration (far from impossible) of the Euro, a two tier currency is needed ( is this possible ?). Thirdly, the opportunity to create alternative funding sources is NOW – creative private sector thinking required as the banks in the Euro Zone are brain-dead as far as customers are concerned.

  5. John JamesJohn James

    The onging Western financial contagion continues to exist on two planes, the US and Europe. Recent history has consistently shown that European political/financial leadership will lag the US in responsiveness to crises. We anticipate a grudging EU/ECB monetary stimulus plan similar to TARP/FRB. This will occur with the initiation (unfortunately much to late) of a reflationary monetary expansion of substantial magnitude. We anticipate the Euro falling to par against the dollar within the next 12 months, if not sooner. This devaluation of the Euro has been delayed due to false pride and the role of the Euro, not as a global currency but simply, as the internal currency of a major economic market. As a consequence, its value has been manipulable more like the RMB than the dollar or Swiss Franc (which we view as simply a gold substitute). We believe, a careful reading of the Maastricht Treaty will demonstrate a legal inability for Greece, or any member State, to default.

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