Euro lacks a government banker

[bmichaud]

http://blogs.ft.com/economistsforum/2011/12/the-euro-lacks-a-government-banker-not-a-lender-of-last-resort/#axzz1gFjs6e6q

 

Good article explaining the failure of the current european construct of a monetary union w/out a fiscal union.

 

The John Mauldin piece attached is an interesting take on the recent Euro summit, and how the ECB's decision to lend to euro banks at 1% for 3 years could potentially be a quasi-QE operation. However, as Barron's pointed out this weekend, euro banks have over $1T of refinancing needs in 2012, as do the sovereigns, for a total refinancing need of $2T for the eurozone. The interviewee in Barron's believes the ECB's lending agreement takes care of the banks' refi needs but does not solve the sovereign solvency crisis. Yes in theory euro banks could fund the sovereigns in unlimited amounts via the ECB, but then total leverage would have to rise significantly from an already gigantic 40 times.

 

Either way, you can only fight debt with debt for so long - eventually equity capital must be created. As Ackman proposed with the GSEs back in 2008, the euro banking system has plent of capital, it's just in the wrong form - i.e. DEBT. Mark the euro banks' balance sheets to market, wipe out equity holders, write-down the appropriate amount of debt, and convert the remaining debt to equity. For the private sector, equity can be created, as it is here in the USA with the government running 10% deficits, via a supra-national entity that has the power to tax and spend in conjunction with the ECB - bottom line for the European private sector, it is deleveraging as the AMerican consumer is right now, but there is nothing to offset the deleveraging as there is here. Germany is stuffing austerity and deflation down the private sector's throat, and there is no good outcome from such a policy. Even SD monetization by the ECB will stop the deflationary spiral because there is nothing to offset the private sector's deleveraging.

 

This is not a complicated crisis to solve if some basic accounting identities are acknowledged (i.e. private sector surplus = public sector deficit) and the appropriate monetary/fiscal system is implemented.

 

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Yes, yes there is plenty room for a long-term value investor to read and study this stuff. 90% of my time is spent reading 10Ks - nothing wrong with a little diversion and some big picture knowledge building 10% of the time.

Sorting_Out_the_Euro_Mess.pdf

[bmichaud]

I think you're right. Unfortunately, due to the flaws in the system and ongoing austerity, risks will continue to build, and a Lehman-like event will manifest itself in another form later on. Who knows what that may be....