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Eurozone U.S. Bank Exposure Redux



October 13, 2011 – Comments (0)

Board: Macro Economics

Author: imyoung

Gold is the money of kings,
silver is the money of gentlemen,
barter is the money of peasants –
but debt is the money of slaves."

– Norm Franz, Money and Wealth in the New Millenium

Hi All,

Sorry for the delay in replying to your answers. That’s one of the big disadvantages of written communication: you don’t have instant feedback and an exchange of ideas as we did during our bull sessions in college where we, in our youthful exuberance and naïveté, solved all the problems of the world till the janitor would throw us out at 2200h. I am currently trying to wrap up things over here in Euroland to be able to go home for Thanksgiving. Because of severe time constraints I have to write bits here and there, during breaks and late at night. Despite proofreading my brain droppings, I am appalled at the mistakes I make and hope you’ll pardon me for my shortcomings. However, if I wait for perfection, I’ll never be able to get anything posted – but why is it that my mistakes always jump at me after I hit the “Post this reply...” button?

Here are my answers to your posts on this thread:

I never said that the chart I posted was all of the picture... it was just a handy chart I found and thought the board might find useful
Thanks for updating you post has much more depth and I thank you for that

The reason I picked on your chart (not on you, as you must have realized) is that it gives a distorted picture of U.S. bank involvement to somebody who does not follow banks, derivatives and other high-risk financial shenanigans. The graph only showed half the truth which is dangerous. I just wanted to be sure that people who may own or consider owning BAC, C, JPM WFC, GS, MS, or insurance companies for that matter, are not lulled into a false sense of security. The risks any financial institution may be exposed to could be immense. We just don’t know and at present have no way of finding out.

And thanks for appreciating my post :)

Is one problem that the issue is too much government debt ... but the politicians can't admit it or they are effectively neutered?

Thanks for the kudos. If I understand your question correctly, it seems to me that it cannot be categorically answered because the circumstances of each sovereign nation were and are different. For some countries the initial problem was not too much government debt but private debt (Spain and Ireland), for others it was, and still is, too much government debt (Italy and Greece). For several countries poor fiscal policies and wasteful spending added further to budget deficits and debt now worsened by a slowing economy. Debt was controllable as long as the bubble kept on inflating but once the disorderly collapse of Lehmann Brothers occurred in 2008, triggering the financial crisis, several countries were no longer able to control their debt, starting with Greece. Bella Italia because of its 75 year old lecherous leader is a case all by itself; I never knew macroeconomic trends could beat any risqué TV soap opera.

To look at government debt and budget deficits for the Eurozone and the USA I constructed a table using data from public sources and computed, hopefully correctly, the percent change (%?).

Government debt and Budget deficit as percent of GDP

[See Post for Tables.]

%? = percent change, computed by yours truly, hopefully without error

Data for the table obtained from:

USA: figures from graph are approximate

As is apparent, except for Italy and Greece, all other listed Eurozone countries in 2009 had lower debt as percent of GDP than the US. But by 2011, all countries had increased their debt. Italy increased its debt the least, by only 3.90%, Ireland the most, by a staggering 75%. The U.S. is with 19% above the total Eurozone increase of 11.4%. If you look at deficits, all countries decreased their budget deficit, except the U.S. For those countries with a booming economy, at this point wishful thinking, the debt to GDP will fall; for those countries with a stalled or contracting economy, debt to GDP will rise which means, the above figures for debt are probably higher now for most if not all countries. The downgrading of several countries and many European banks will raise the cost of debt and the debt level even further. With the threat of a possible Greek default, combined with Italy’s high debt, the Eurozone banking system has also come under severe pressure. Since banks are globally interrelated, defaults in the Eurozone will affect the global financial system, according to some experts especially that of the UK and US. The UK now also reports its highest unemployment rate in 17 years and the US unemployment rate is most likely considerably higher than what the government reports, i.e. September 2011 Unemployment: 9.1% (U.3=monthly headline number), 16.5% (U.6=Bureau of Labor Statistics), 23.1% (SGS).(1) The International Monetary Fund (IMF) seems to be quite concerned about increased risks to the entire global financial system(2) and published its Global Financial Stability Report in September 2011 instead of the usual month of October. It traces the four stages of the financial crisis, starting with Lehman Bros. in 2008 and has one chapter that may be of interest to METARites on long-term investors and their asset allocation.(3) I can highly recommend following these reports, issued each April and October. They are a bit dry but worth studying.

(1) John Williams’ Shadow Government Statistics (SGS), Analysis Behind and Beyond government Economic Reporting: Alternate Unemployment Charts,

I have been following Williams for years. He used to offer free subscription and make a lot of current data available. You can still access summaries of current data as well as his archives of back-issues of the newsletter, Special Reports, and a library of charts monitoring official data, and graphs of his Alternate estimates. His Primer Series on key economic reporting is excellent to learn about this dry but important subject, see

(2) Financial Time, IMF warns on global financial system, (subscription is free for 10 articles per 30 days, if you have exceeded them, google the title)

(3) IMF, Global Financial Stability Report - Grappling with Crisis Legacies, September 2011. Chapter 2 may be of interest: Long-term Investors and their Asset Allocation: Where Are they now?. It can be downloaded separately. You’ll also find webcasts of press briefings

From the above table and the significant decrease in budgetary deficit for all Eurozone countries it is obvious that the politicians are now trying their best to get their finances in order. While most of the problem Eurozone states delayed getting started on the necessary reforms, I do not think they are at this point unwilling to admit the problems or that they are effectively neutered, except perhaps for Italy’s Berlusconi. A German economist thinks that a lot of the dithering and delaying is not only due to elections in several countries but because most politicians don’t have any economic training and don’t quite understand the workings of the complex global financial market. Without that knowledge they simply cannot lead their countries to fiscal fitness or prevent financial meltdowns. Prior to the recent German vote on the EFSF, this economist led a mandatory seminar of Economics 101 for top German politicians and would welcome mandatory formal economic training for all EU politicians. Perhaps greater economic understanding would have spurred France and Germany to move more swiftly and effectively a year ago when it became apparent that Greece was sliding toward default.

It took some time for Spain’s Zapatero’s to see the light and to finally start the necessary reforms of the pension and banking systems, thereby risking his and his party’s political future, but it may have been too little, too late.(1) Spain’s debt rose 28% in two years but its economic growth, initially stalled, seems to be slowly improving. It should begin to do well if it weren’t for the recent downgrading of its public debt and several of its biggest banks that have been undercapitalized for years.(2)

(1) The Economist, A great burden for Zapatero to bear,

(2) Reuters, Fitch cuts Italy, Spain ratings; outlook negative,

Italy’s 75-year-old Berlusconi, rich media mogul and devotee of la dolce vita, appears unconcerned about such minor problems as a bit of government debt, amounting by now to a total of 2.4 trillion. Even after the S&P downgrade of Italy’s debt he refused to recognize that his country is in serious trouble. Only after massive pressures from the European Central Bank (ECB), Italian officials and the public has Berlusconi finally begun the necessary reforms to prevent a fiscal catastrophe. Because he has also lost the majority in government, he is ‘effectively neutered” making it difficult to get things done. In September La Vanguardia of Barcelona, comparing Spain with Italy, assessed the situation as follows: “Italy is skulking about a labyrinthine approval of its adjustment plan, of which three versions have been drafted in recent weeks against a backdrop of immense political turmoil and a robust union response.” (1) To add to Italy’s problems, Berlusconi has little time to run the country as he is currently locked in a dangerous vendetta with, of all people, his Finance Minister, Guilio Tremonti,(2) and is mired in numerous legal problems relating to corruption and his having had sex with an underage prostitute at one of his notorious bunga bunga orgies. Even prominent Italians have voiced their public embarrassment about their leader who seems to have lost touch with reality. Voices demanding his resignation are getting louder especially after his latest gaffe, first reported by The Australian, where Berlusconi publicly quipped that his party should change its name to "Go P****(3) Unbelievable! and this from a guy who is the Prime Minister of a major country. His often vulgar and misogynistic jokes have provoked the ire of feminists, antiracism campaigners, and even the Roman Catholic Church. The latter felt compelled to issue a strong reprimand about ‘Italy’s ruling class'.(4) And all of the big rating agencies have downgraded Italy, I suspect because the market has lost confidence in its unruly government.

The Germans are watching this Italian soap opera with great misgivings. A slowing economy and the downgrading of Italy’s sovereign debt signal serious problems on the horizon. The Eurozone would not be able to bail out Italy, its third largest economy. Italy could be doing well if it weren’t for its chaotic government and now the loss of confidence of the financial markets. It has one of the lowest deficits and unlike Greece, it has good industries. Another positive is the high savings rate and low personal debt of Italians and so far Italy has not needed any funds from the Eurozone, the main reason the European Union has limited influence on this indebted nation and its decadent leader who is on his way out but so far there is nobody waiting in the wings to take his place.

(1) La Vanguardia, Madrid and Rome – two sorts of crisis, republished by PressEurop (it publishes the best of the European press in 10 languages)

(2) Der Spiegel, Berlusconi Locked in Risky Vendetta with Minister,,1518,788654,00....

(3) Cannot give a reference since all URLs contain the vulgarity that gets caught by the TMF profanity filter: The Australian: "[Vulgarity]: Berlusconi finds new party name"; The Guardian; The New York Magazine, etc.

(4) New York Times, Quiet for Years, Italian Church Blasts Behavior of the Nation’s Political Elite,

Greece’s Papandreou, after heavy pressure from the Germans, eventually was able to accept the need for drastic cuts of expenses. The Greeks were able to decrease the budget deficit from 13.5 to 9.5, a reduction of 30% but they have not been able to cut the number of government workers as requested by the troika (financial experts from the IMF, European Union, European Central Bank) in the beginning of September. The troika returned to Greece last week to assess progress and their report has been postponed until the end of this month. During my break yesterday I listened to the 16:00h German news. Mr. Matthias Mors, member of the troika confirmed the above figures of deficit reduction to 9.5% and the availability of another Euro 8 billion in the beginning of November. After the official troika’s report we should see if Papandreou is effectively neutered or if he and some of his party will show in deeds the words he proclaimed to German politicians and business people in Berlin a day before the German vote on the EFSF( “Yes, we can!”, in English, mind you). I cannot see how the Greeks can reduce their debt given the sky-high costs of debt servicing, a moribund economy, persistent corruption on all levels, constant strikes, and totally chaotic infrastructures.(1) In Greece nearly 25 % of the workforce, that is every fourth person, is employed by the government. Nevertheless, the inefficiencies are astounding. In a report on German TV they showed the tax collecting agency of Piraeus, considered one of the most efficient in Greece. The workspace looks like a hurricane has hit it: stacks of files on desks and chairs, piled high on shelves, sitting in boxes and stuffed in jumbo trash bags. They don’t have enough employees or computers to do the work and are hopelessly behind in their caseloads. Probably 30% of Greece’s GDP is not declared according to Constantinos Bacouris, chairman of the Greek branch of Transparency International. Greece just recently started a Pubic Lands Survey System and recording of real property. So far only 10% of Greece’s real properties have been recorded against vigorous protestations of private owners. It will take years and probably a generation for the Greeks to change their way according to Mr. Bacouris.

Last week German Economy Minister Philip Rösler spent a couple of days in Greece with a contingent of about 70 German industry representatives to help get the stalled Greek economy back on track and increase Greek competitiveness. Rösler has also been working on a plan patterned after the Marshall Plan to help the Greeks build the infrastructures necessary to become a productive member of the Eurozone. According to a Reuters’ video, Berlin has offered to send civil servants and banking experts to help Athens on matters ranging from investment and project financing to regulation and EU subsidies. There is much mistrust between the two countries - many German taxpayers resent the 110 billion euro bailout of Greece agreed last year, of which Berlin is the single largest contributor - while many Greeks resent the painful austerity measures that have been inflicted on them. The hope is that this new agreement may go some way to changing that. About two weeks prior to his trip Rösler had openly talked about he possibility of a Greek default, until then a taboo subject in Germany. He angered Chancellor Merkel and had to endure some very ugly demonstrations while in Greece. One positive development that followed the furor after the minister’s remarks is the now open discussion of a possible Greek default. For further background on Greece and the future of the Euro, see (3), reference courtesy of DarthFerret,(4) although I do not share his conclusions at this point in time, Maybe I have too much faith that common sense for the common good will eventually prevail.

(1) BBC, The dark side of Greece's economic ills:

(2) Reuters Video: Germany offers Greece a helping hand (1:36),

(3)Der Spiegel, The Ticking Euro Bomb: What Options Are Left for the Common Currency?,1518,790568,00....

(4) DarthFerret, The Euro Experiment: Only 2 Options Left,


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