Why Eurozone's Fiscal Crisis Should Concern You

For several weeks now, the government leaders of West Europe grappled with what to do as, beginning with Greece, country after country approaches insolvency, buried under mountains of debt.  But Americans seem oblivious, with half of the U.S. population going on a giddy buying spree on Black Friday after Thanksgiving, in stubborn denial of the European fiscal meteor that can and will impact the United States.
One after another, alarm bells are sounded.
The Economist says on Nov. 26, 2011:

A euro break-up would cause a global bust worse even than the one in 2008-09. The world’s most financially integrated region would be ripped apart by defaults, bank failures and the imposition of capital controls (see article). […] The survival of the EU itself would be in doubt.[…]

The panic engulfing Europe’s banks is no less alarming. Their access to wholesale funding markets has dried up, and the interbank market is increasingly stressed, as banks refuse to lend to each other. Firms are pulling deposits from peripheral countries’ banks. This backdoor run is forcing banks to sell assets and squeeze lending; the credit crunch could be deeper than the one Europe suffered after Lehman Brothers collapsed.

Add the ever greater fiscal austerity being imposed across Europe and a collapse in business and consumer confidence, and there is little doubt that the euro zone will see a deep recession in 2012—with a fall in output of perhaps as much as 2%. That will lead to a vicious feedback loop in which recession widens budget deficits, swells government debts and feeds popular opposition to austerity and reform. Fear of the consequences will then drive investors even faster towards the exits.”

Agustino Fontevecchia writes in Forbes, Nov. 28, 2011, that the Eurozone crisis is spreading to the private sector:

“The European situation continues to deteriorate and has now spread even to Germany, the eurozone’s economic engine, as evidenced by a failed bond auction last week.  As sovereign debt markets deteriorates, the risk of a credit crunch looms, raising the stakes for policymakers and the private sector alike.”

Wolfgang Münchau warns in the Financial Times, Nov. 27, 2011, that the Eurozone has only days to avoid a collapse:

“With the spectacular flop of the German bond auction and the alarming rise in short-term rates in Spain and Italy, the government bond market across the eurozone has ceased to function. The banking sector, too, is broken. Important parts of the eurozone economy are cut off from credit. The eurozone is now subject to a run by global investors, and a quiet bank run among its citizens.”

As a matter of fact, quiet or not, there was a bank run in the Baltic country of Latvia on September 24, 2011.
The event that triggered the bank run was the arrest of two former shareholders of Bankas Snoras AB, for embezzlement, document forgery, accounting fraud and abuse of authority. Kinda like what New Jersey’s former Democratic governor and senator Jon Corzine did as CEO of MF Global.
In Latvia, the arrests precipitated a bank run. The Latvian government stepped in. Depositors could withdraw only 50 lati (about $95) a day, as the government moved to liquidate the bank.

Indeed, Europe’s banking sector is broken.
More than a month ago, on September 21, 2011, just when European banks and their regulators were trying to reassure investors and customers that lenders have enough capital to withstand a default by Greece and slowing economic growth caused by governments’ austerity measures, Lloyd’s of London, the world’s oldest insurance market, abandoned those banks.
Lloyd’s pulled deposits from European banks because of concerns that European governments may be unable to support lenders in a worsening debt crisis. As Lloyd’s finance director Luke Savage explained,

“There are a lot of banks who, because of the uncertainty around Europe, the market has stopped using to place deposits with. If you’re worried the government itself might be at risk, then you’re certainly worried the banks could be taken down with them.”

I didn’t know about that, did you? I only learnt of what Lloyd’s of London did, two days ago. Some news media we have in the United States!
And if you think what happens in the Eurozone doesn’t affect us, think again.
Already, the Eurozone debt and banking crisis has led to the 8th biggest bankruptcy in U.S. history — that of the giant financial derivatives broker MF Global. The brokerage had used its clients’ funds to invest in European government bonds. But the investments went bust and MF Global went bankrupt, taking hundreds of millions of its clients’ dollars with it.
Who knows how many other U.S. brokerages, banks, and credit unions have invested in European government bonds?
Meanwhile, we in the United States have our own humongous national debt to worry about. The news today is that Fitch, the credit-ratings company, just downgraded its outlook for the United States to “negative.”

Update (Nov. 29, 2011):

Fox Business reports that yesterday, Standard & Poor’s cut its credit ratings (from A to A-) for many of the world’s largest banks, including Citigroup, Goldman Sachs, Bank of America, JPMorgan Chase, Wells Fargo, and Morgan Stanley.
The move follows S&P’s shift, announced earlier this month, in the methods it uses for rating the banks. Dozens of other banks were also affected by S&P’s new criteria and many of the downgrades stemmed from the affected banks’ exposure to the European debt crisis. S&P cited weaker confidence in governments’ ability to bail out struggling banks.

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8 years ago

Thank you, Dr. Eowyn, for this excellent post. It is most noteworthy, as you say, that the media in the U.S. are not reporting the correlation between Europe’s financial disaster and for example, the MF Global Chapter 11 proceeding. Fraud affects the guilty and the innocent. We do not live in a vacuum and we are affected by the world economy. It is getting more frightening. And, it is most disconcerting that the media is not reporting the facts and that the media is controlled and is not unbiased. Thank you for reporting the facts, even though they are so… Read more »

8 years ago

Take a good look, because that is going to be us in a few short years.
I really hope a lot of Americans wake up between now and next November, because I am still seeing too much complacency out there – even among many conservatives who don’t seem to grasp our perilous situation.

molf brandt
molf brandt
8 years ago

Yeah those europeans,,,,,makin off with our money an trin to ripp us off…thanks GOD Im a black, homosexual, god lovin americant….lets nuke them

Alice Wolf
8 years ago

They certainly are a sorry bunch. The sovreignty of the EU nations is virtually extinct, which had been undergirded by the Treaty of Westphalia. Now, the culture, the languages and traditions of these nations are all being eradicated by the unelected leaders in Brussels. The desperate attempts to salvage the banks indebtedness is DOA, so why on earth is the United States hanging around, waiting to go down with the EU? If the House passed HR 1489 which would reinstate the Glass Steagall standard, then the derivative debt which is rampant, here and in the EU, would get taxpayers here… Read more »

Alice Wolf
8 years ago

In retrospect the definition of “economy” is often confused with “the market” and a virtual economy that takes place every second or less in trades. This kind of activity is lucrative perhaps for Wall st. and the Investment Bankers, but the reason we need CREDIT is for investment in real productivity, per head per square kilometer. This is what creates wealth. Getting NASA back together again as the massive science driver it once was before President Obama decided that since we already visited the Moon why bother to do it again? and get NAWAPA underway, a massive water management plan… Read more »

Alice Wolf
8 years ago

Now we see and hear that “Central Bank” has to be the FED is handing out even more low interest “loans” to European banks to ease the strain of low confidence in the EU to be able to manage it’s own affairs. Who exactly are the guys in charge of the EU in their newly built HQ Palace. Whoever gave them the authority to tell the Irish, the Greeks, the Italians, the Portuguese, etc how they should live after the concept of the Euro has proved not to have been well thought out enough to cover the discrepancy between the… Read more »