October 7, 2011
If this statement had come from some hedge fund flunkie or cable business news jock, it could safely be dismissed as an attempt to get attention and ratings.
Instead, it comes from bail out expert Robert Shapiro who works as an advisor to the International Monetary Fund. Shapiro, according to Business Insider, is no financial gadfly:
Aside from being an advisor to the IMF, Shapiro is the co-founder and chairman of Sonecon, LLC, and was formerly the U.S. Undersecretary of Commerce. He has a Ph.D. from Harvard, among other degrees, oversaw the Census Bureau, and has been a Fellow at Harvard, Brookings, and the National Bureau of Economic Research.
If you’ve been reading a lot of business news from Europe lately, you have probably learned to read between the lines of what officials the European Central Bank, principles in government, and other experts have been hinting at. And that is, we are heading for a major league meltdown unless the euro states can come up with a plan to settle the Greek default situation, recapitalize big banks who are hanging by a thread at this point, and find a way to refinance the debt of Italy, and Spain.
A week after the BBC exploded Alessio Rastani to the stage, it has just done it all over again. In an interview with IMF advisor Robert Shapiro, the bailout expert has pretty much said what, once again, is on everyone’s mind: “If they can not address [the financial crisis] in a credible way I believe within perhaps 2 to 3 weeks we will have a meltdown in sovereign debt which will produce a meltdown across the European banking system. We are not just talking about a relatively small Belgian bank, we are talking about the largest banks in the world, the largest banks in Germany, the largest banks in France, that will spread to the United Kingdom, it will spread everywhere because the global financial system is so interconnected. All those banks are counterparties to every significant bank in the United States, and in Britain, and in Japan, and around the world. This would be a crisis that would be in my view more serrious than the crisis in 2008…. What we don’t know the state of credit default swaps held by banks against sovereign debt and against European banks, nor do we know the state of CDS held by British banks, nor are we certain of how certain the exposure of British banks is to the Ireland sovereign debt problems.”
But no, Morgan Stanley does, or so they swear an unlimited number of times each day. And they say not to worry about anything because, you see, it is not like they have any upside in telling anyone the truth. Which is why for everyone hung up on the latest rumor of a plan about a plan about a plan spread by a newspaper whose very viability is tied in with that of the banks that pay for its advertising revenue, we have one thing to ask: “show us the actual plan please.” Because it is easy to say “recapitalize” this, and “bad bank” that. In practice, it is next to impossible. So yes, ladies and gentlemen, enjoy this brief relief rally driven by the fact that China is offline for the week and that the persistent source of overnight selling on Chinese “hard/crash landing” concerns has been gone simply due to an extended national holiday. Well, that holiday is coming to an end.
Bottom line: Governments are scared. A whiff of panic is seeping into markets which is preventing banks from lending to each other — exactly what happened after the Lehman Brothers fall in the US in 2008. The ECB has taken to giving out short term loans to the big banks so that they can stay afloat because they are scared to carry on the normal inter-bank lending due to uncertainty about whether those loans would ever be paid back. This is exactly what the Fed did in 2008.
The Washington Post explains that there is now a high stakes game of chicken going on between the European Central Bank and member nations:
Although everyone acknowledges it would be preferable for democratically elected leaders to make the moves toward economic unity that are the most promising solution for the crisis, it would be much more politically convenient for politicians if the unelected technocrats at the ECB would take those steps and become the channel through which Europe’s losses are realized.
Somebody is going to have to blink.
The ECB’s efforts to hold the line were evident Thursday as it declined to cut interest rates to try to address a weakening European economy. By contrast, the Bank of England expanded a program of buying bonds to try to push money into the British economy, a move known as quantitative easing. The bank on Thursday announced 75 billion pounds in new purchases. (Two weeks ago the Federal Reserve also eased monetary policy in the United States, further illustrating the deep concern within the U.S. and European central banks about the economy.)
“The economic outlook remains subject to particularly high uncertainty and intensified downside risks,” ECB President Jean-Claude Trichet said Thursday, raising the possibility that the ECB will ease monetary policy sometime in the near future.
My colleague at PJ Media, David Goldman (aka Spengler) thinks that any meltdown in Europe won’t affect us in America that much:
That is what keeps the market in a state of near-panic. There is no way to align the players for a solution except by pushing the situation to, and perhaps over, the brink. To put the Italian (let alone the Greek) political class into receivership, it may require actual, national receivership: banks shut their doors, pension checks aren’t mailed, oil refiners close, tankers are turned back at the ports for lack of cash. I do not think any such thing will occur. Nor do I think that an Italian national bankruptcy will mean much for the world economy.
Remember that two thirds of the world’s population (China, India, peripheral Asia, Latin America) is still enjoying strong economic growth. The U.S. economy is weak but not crashing. Europe is a big chunk of the world’s GDP, and it is crashing, but its importance is diminishing by the year. It’s not the end of the world; it’s just the end of the Europeans.
I sincerely hope he’s right. Greece will not be able to pay its government workers in 2 weeks and will need another slice of the bail out money already agreed to. To get it, they have to pass inspection from the IMF and their euro creditors. The chances of Greece not getting that money, regardless of their adherence to the bail out plan, are slim and none so it would appear that we are probably safe – for the moment.