Billionaire investor George Soros says that the global financial system is on the brink of collapse. Developed countries are falling into a "deflationary debt trap," in which consumer spending falls, products become more expensive, tax revenues drop, and sovereign debt grows...More at the Huffington Post and the Wall Street Journal. Other commentators have noted that the recent interventions in the European system alleviated only the liquidity crisis, not the underlying debt problems.
Concern is mounting that the eurozone may break up because of market pressure on European sovereign debt, which could plunge Europe into a depression and the world into a recession. Observers are already worried that Europe could suffer a recession and subsequent slow growth for several years even if it averts a eurozone breakup, since products would remain expensive in the euro, making consumers more hesitant to buy them and forcing governments to curtail budgets even more as consumer spending falls...
If Italy or Spain defaults on their sovereign debt and leaves the eurozone, it would probably break up. Depositors likely would pull their investments from banks, large European banks would fail, borrowing costs for other countries would become unsustainable, and other countries would leave the euro. Such an outcome would depress lending and consumer spending and plunge Europe into a deep recession...
Addendum: Here's some more from the Washington Post re collateral damage in the U.S.:
To get a sense of how vulnerable the U.S. economy could be if the euro currency union cracks apart, start with the volume of U.S. exports to the euro zone — $153 billion in the first six months of the year. Add several hundred billion dollars in investments by U.S. banks in the euro zone and several trillion dollars’ worth of other financial contracts between the two economies...
American banks and other companies could find themselves battling with any country that leaves the euro union and reinstates its own currency. “The risk is likely paralysis,” said Michael Hood, a market strategist at J.P. Morgan Asset Management. “You won’t even know what people owe you.”..
According to the Bank for International Settlements, U.S. banks have more than $220 billion at risk through investments in German and French banks alone. If those firms start to topple, U.S. financial companies could as well, a hazard highlighted by the failure this fall of the MF Global brokerage firm because of its dealings in Europe.
The Washington Post excerpt is wholly inaccurate as to the financial collapse of MF Global.
ReplyDelete"[...] the failure this fall of the MF Global brokerage firm because of its dealings in Europe."
MF Global didn't "fail" - it lost billions of dollars and filed for bankruptcy. Failing is when you don't make a sale, or can't meet a deadline. Allowing yourself to enter into $39.4Billion of debt while only having 41$Billion is more along the lines of "F***ing up." Losing 1.2 Billion dollars of your client's money on your own speculation definitely requires stronger words than 'fail.'
They didn't collapse/fail/f'up because of their dealings in the EuroZone. They failed because they invested money they could not afford to lose (Money which they held on behalf of clients. It was not their money to invest.) Investigators are still determining which actions were illegal as opposed to colossally stupid.
The Euro's problems could not force them to:
lose 1.2$ Billion of customer money.
develop 39.6 Billion in debts while only holding 41Billion.
invest customer funds in the first place.
What drives me nuts? Smaller forex firms are under constant surveillance by gov't regulators (even ones that never touch customer funds ensuring that even if they went out of business, every cent of the customer's money would still be there.), but the big banks are routinely asked to write finance reform laws and run their own regulatory bodies.
Anonymous above hits it exactly right. A bunch of big banks gambled. A bunch of big banks lost a LOT of money. Now they are sowing panic in an effort to get the public to pay for their losses. This is why austerity measures in Europe are meeting with such opposition, and why Europe is finding it so hard to come up with a debt-sharing plan. Just like we in the U.S. hate bank bailouts, so do the Europeans. But whereas the banks and big business already own the U.S. government, Europe is still a little too fragmented for the banks to get what they want so easily. Thus the 'Euro crisis'.
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