Giving Cold Water to Somebody in Hell: European Debt, Where Do You Start?

EU LeadersFor market watchers the ongoing debt problems in Europe have surely caused a lot of angst for investors.  It seems like every day there are new problems with sovereign debt in Europe.  What once was Greece has now spread to Italy, Spain and several other countries.  Even France has seen their borrowing costs rise as investors have dodged buying any government bonds.  This thing is getting very serious and it seems like almost nobody wants to take responsibility.

It has meant that huge amounts of capital have been moving around markets very quickly.  US treasuries have been the final destination for much of that money and the value of the US dollar has gone up because of that.  That’s like giving a glass of cold water to somebody in hell.  I say that because the Americans have their own problems with debt.  Just today the US Congressional super committee which was set up to reduce government deficits by $1.2 trillion announced that they had failed to do so.  That led to a tumbling in the stock market and general nervousness is starting to become a real constant.

The world needs financial clarity right now because capital likes safety and it would seem that there is nothing safe.  In the meantime commodity prices are dropping and jobs are being lost.  The world needs an infusion of optimism.

It is a difficult situation we find ourselves in.  For those of us working at honest jobs in southwestern Ontario, much of this must seem so foreign.  How can the intransigence of European banks lending money to southern European nations impact us?  The problem lies in the degree of how big this is.  There is so much capital tied up or loaned out with the specter of no repayment very big on the radar screen.  At a certain point, that will either mean bank failure or countries defaulting.  Usually when the loan is given which goes bad there’s give-and-take on both sides.  In this case loans to governments are a different matter.  Many of the European banks are simply looking for a bailout of sovereign debt.  They don’t want to eat much of those themselves.

It is serious now but it will be much more serious if there is a “run on the banks” as they say.  Can you imagine Europeans in 2011 lining up outside of some of their bigger banks just simply to get their money and stuff it in their mattress? It is hard to imagine but if people lose enough confidence with their banking institutions, it will happen.  Perish the thought.

There is lots of blame to go around but probably the biggest culprits are those who just want to kick the can down the road.  That is a metaphor for dealing with the problems later someday.  There is no question in my mind that a common currency without a common fiscal policy makes little sense now.  This is such a slow-moving train wreck.  Every day it’s like another car falls off the tracks, markets plunge in there never ending battle of risk aversion.

Of course there are many other things going on in the world that can cause economic jitters.  About 30 people have been killed in Cairo’s Tahir Square, the site of the revolution that took place there earlier this year.  Apparently military rule is not what those protesters were wanting when they ousted former Egyptian President Hosni Mubarak.  Despite the fact that elections were scheduled for about one week from now, political unrest there adds to the economic uncertainty equation.

Then there is Iran.  Iran has announced that they will not kowtow to Western interests with regard to their nuclear technology.  Western countries including Canada have imposed new sanctions on Iran to try and curtail their nuclear production.  I have no problem with Iran having a nuclear technology.  Pakistan has it and that doesn’t seem to be a problem to anybody in the West.  However, one rogue missile sent into Israel from Iran would have obvious catastrophic effects on the world economy.  So in Western capitals, Iran is now top drawer.

With this going on, how can we be positive about the global economy?  Well, it is pretty hard.  There seems to be a myriad of problems that are putting the brakes on economic growth.  Yes, I did mention China a few weeks ago.  Let’s hope they have something left.  We might just have to depend on Asia getting the world economy out of this mess.