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[Insert European economy here] in deep ****

Discussion in 'BBS Hangout: Debate & Discussion' started by Invisible Fan, Jan 26, 2009.

  1. Invisible Fan

    Invisible Fan Member

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    http://www.usatoday.com/money/world/2009-01-26-iceland-government-falls_N.htm
    Fall of Iceland government tip of the iceberg?
    Ken Dilanian, USA TODAY
    When Iceland's ruling coalition broke apart Monday, it became the first government to fall as a result of the world financial crisis. It may not be the last.

    Iceland's case is unique because the tiny country's entire banking system collapsed in October, decimating the value of the life savings of most residents on the island. Still, other countries in Europe are experiencing political unrest because of the global economic downturn.

    In Latvia last week, a riot ensued after 10,000 protesters marched on parliament. Demonstrations also turned violent in recent weeks in Bulgaria, Lithuania and Greece.

    "I think we are still headed sharply downhill in the world economy and the U.S. economy, and I don't pretend to know how far," said Ralph Bryant, a former director of the Federal Reserve Board's Division of International Finance and a senior fellow at the Brookings Institution. "Every country in Europe is troubled by these things."

    At a forum Monday in Washington, International Monetary Fund chief Dominique Strauss-Kahn complained that the world's major economies aren't moving fast enough to shore up their banks and otherwise address the crisis.

    "Very little has been done," he said. "I don't say nothing has been done, but it's moving very, very slowly."

    Frustration turns to violence

    Iceland's government fell after the U.S.-educated prime minister, Geir Haarde, couldn't reach a deal on sharing power with another party in his coalition.

    That came after Haarde last week called for elections in May, ahead of those scheduled for 2011, after weeks of protests by Icelanders upset about soaring unemployment and rising prices. Haarde announced Friday that he has cancer and would not seek another term.

    Weekly rallies have been held in Iceland since the banks collapsed in October. The protests grew more frequent and were mostly peaceful until last week, when demonstrators threw paint at the parliament building and hurled eggs at the prime minister's limousine. On Thursday, police used tear gas for the first time since 1949 to quell a disturbance.

    Iceland, a country of 304,000 people — slightly less populous than Pittsburgh — saw its banking system grow in the last decade to nine times its economic output, fueled largely by deposits and investments from abroad in a major retooling of its economy.

    In September, after bank lending dried up in the wake of the Lehman Bros. collapse, Iceland's banks became insolvent and had to be nationalized.

    The International Monetary Fund, which loaned the country $2.1 billion to help it recover, estimates Iceland's economy will contract 9.6% this year.

    "What is unique about Iceland — they're incredibly tiny with a big financial sector," said former Federal Reserve governor Frederic Mishkin, a Columbia Business School professor who has studied the country's collapse. "One of the lessons here is that if you're in a situation like this, you're extremely vulnerable to an international financial crisis."

    The Belgian government also resigned in December after a top court found that it had improperly sought to influence a legal ruling on the bailout of a troubled bank, Fortis. But the issue there had more to do with whether the government violated separation of powers than popular unrest over the economy.

    Signs of weakness elsewhere

    Preston Keat, research director with Eurasia Group in New York, notes that other small Western European countries with large banking systems are at risk, including Ireland and Austria. Potentially shaky banking systems in former Soviet satellites, such as Hungary, Romania, Bulgaria and Ukraine are most vulnerable.

    So far, governments in major European economies such as Britain, France and Germany have retained political support through the crisis, in part by responding with massive stimulus packages, said Harvard economist Philippe Aghion.

    Western Europe also benefits from its welfare state, which provides for generous government spending that kicks in when workers lose their jobs, providing an automatic stimulus, said Iain Begg, a professor at the London School of Economics.

    Still, in Britain, support for Prime Minister Gordon Brown's ruling Labor Party is slipping, a poll released Monday by ICM for The Guardian newspaper showed. The survey also found that less than a third of the country thinks Brown's latest steps will improve the economy.

    Frustration with leadership is even more acute in Eastern Europe, where countries that joined the European Union in recent years to improve their economies are now experiencing the downside, Begg said.

    Workers who had found jobs in fast-growing EU economies such as Ireland are now unemployed, he said.

    That's bad news for the United States, he said, which has an interest in a stable, more integrated Europe.
    ====--------===
     
  2. Invisible Fan

    Invisible Fan Member

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    So not only has the UK's bubble collapsed, it seems like AIG's CDS spree has forced/will force a lot of European banks in bailout territory...except those bailouts need the backing of the EU.

    http://www.businessweek.com/magazin...dex+-+temp_news+++analysis?campaign_id=rediff
    How AIG's Credit Loophole Squeezed Europe's Banks
    Firms such as Dexia snapped up loads of credit default swaps, often from AIG, in a scheme to leverage their capital for more lending

    By David Henry, Matthew Goldstein and Carol Matlack

    European banks didn't gorge on subprime assets as much as their U.S. counterparts did. So why do foreign lenders suddenly need a bailout? Their deals with insurer American International Group (AIG) may offer a clue.

    Before the financial crisis hit, AIG did a booming business in credit default swaps, complex instruments originally designed to protect lenders if borrowers fail to make debt payments. The biggest buyers were European banks, whose deals last year with AIG totaled a staggering $426 billion. But the banks didn't always buy the swaps as insurance against defaults—they often used them to skirt capital requirements. AIG declined to comment.

    Under international regulations known as the Basel Accords, European lenders have to set aside a certain amount of money to cover potential losses. By owning credit default swaps, banks could make it appear as if they had off-loaded most of the risk of a loan to AIG or another firm, thereby reducing their capital needs. The perfectly legal ploy allowed banks across the Continent to free up money to make more loans. It was part of the game taking place across the global financial system. During the boom, firms seemingly created money out of nothing, propelling the markets to unsustainable heights.

    Such excessive risk- taking has brought down several European lenders. Consider Dexia, which received an $8.7 billion bailout from regulators in late September. The Brussels bank boasted about its credit default swaps in a press release last year, saying that the deals "freed up regulatory capital." A Dexia spokesman now says the firm made little use of such swaps.

    Another busted bank, Fortis, noted in a May 2007 investor presentation that it planned to use "capital relief transactions" to help fund its purchase of ABN AMRO assets. A Fortis spokesman says the bank didn't buy swaps to improve its capital position.

    Until late 2007, AIG gave its deals with European banks cursory mention in filings. Then the insurer got smacked by subprime losses on unrelated transactions. After that, investors pressured AIG to come clean about all of its sophisticated deals. AIG officials said in a Dec. 5 conference call that banks using credit default swaps could set aside capital that amounted to only 1.6% of a loan's value, vs. 8% without.

    European banks didn't tap only AIG. Bermuda's Primus Guaranty (PRS), a firm that sprang up during the boom, targeted European banks looking to game regulations. Philadelphia bond insurer Radian Group (RDN) marketed "Basel-friendly" swaps. Says Daniel Gros, director of the Centre for European Policy Studies in Brussels: "Through adjustments, [banks] could convince regulators that there was low or no risk."

    AIG's credit default swaps, though, delivered an extra dose of leverage to the financial system. Given its high credit rating, AIG could make deals that required it to put up a meager amount of collateral, or cushion, against losses. The upshot: AIG boosted lending with little money.

    But the gambit worked only as long as AIG maintained its credit rating. If the insurer were downgraded, AIG would have to pony up more cash. Otherwise the deals would fail—and banks would have to raise capital or dump assets.

    That very scenario started to unfold on Sept. 15 when AIG got downgraded. Within 24 hours, the Federal Reserve stepped in with an $85 billion bailout to save the company. These days, AIG no longer makes such deals. It's just another way credit is contracting as the financial system pays for the excesses of the past.

    Henry is a senior writer at BusinessWeek. Goldstein is a senior writer at BusinessWeek. Matlack is BusinessWeek's Paris bureau chief.
     
  3. rimrocker

    rimrocker Member

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    Iceland... WTF?
     
  4. God's Son

    God's Son Member

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    well they have safety net and we dont so no matter what the avg german or frenchman or englishman is better off than avg american in any economic crisis like this

    would u rather be unemployed in amerika or unemployed in france or germany or sweden or norway or britain?
     
  5. Master Baiter

    Master Baiter Member

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    I bet no one can guess what I would pick.
     
  6. KingCheetah

    KingCheetah Atomic Playboy
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    <object width="425" height="344"><param name="movie" value="http://www.youtube.com/v/jX9y6AA5oOo&hl=en&fs=1"></param><param name="allowFullScreen" value="true"></param><param name="allowscriptaccess" value="always"></param><embed src="http://www.youtube.com/v/jX9y6AA5oOo&hl=en&fs=1" type="application/x-shockwave-flash" allowscriptaccess="always" allowfullscreen="true" width="425" height="344"></embed></object>

    I'm not surprised.
     
  7. BetterThanEver

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    What safety net? Their money is devaluing so fast, that everybody's retirement iwill be worthless by the end of the year.. It doesn't matter if that money is coming from a private account or the government. Price of imported goods like gas, fruits and vegetables are have jumped in price.
     
  8. BetterThanEver

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    http://www.irishtimes.com/newspaper/world/2009/0126/1232923365959.html

    The number of bankrupt businesses out number the non-bankrupt businesses by 7 to 3. That's crazy. Imagine if 70% of your stores in your town being bankrupt. Now imagine that half the people you know is practically bankrupt, including your boss, senior management, parents, church members, co-workers, and government officials.

    You can't go to the government for a safety net, because they are going belly up, too. They need to get an IMF loan, just to survive this quarter.
     
  9. Invisible Fan

    Invisible Fan Member

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    When Europe starts to melt at the edges

    By Gideon Rachman

    I once knew a senior European Union official – an Austrian – who argued to me that Greece had no place in the European Union. “Greece is not really culturally European, it’s part of the Middle East,” he insisted. “Just listen to their music.”

    To this the Greeks might legitimately reply: “Plato, Aristotle and (on the musical issue), Demis Roussos.” But my Austrian friend’s views, while eccentric, touched on a real and sensitive issue within the Union: the fear that it is economically and politically divided between a northern hard core and a flaky southern fringe.

    This division became temporarily less important when the EU expanded to let in the countries of the former Soviet bloc – which then became the objects of the condescension formerly reserved for the likes of Greece and Portugal. But the EU’s north-south divide is now being brought back into focus by the global economic crisis.

    The difference between the performance of the southern and northern European economies is now so acute that even pro-European think-tanks, such as the Centre for European Reform – in “The Euro at Ten: Is Its Future Secure?” by Simon Tilford – are speculating that Europe’s single currency, which currently includes 16 EU countries, could break up under the strain.

    It might seem a little cheeky for somebody writing from London to predict a crisis in the eurozone. The pound is plunging and some are comparing Britain’s plight to that of Iceland. But just because Britain is in trouble, it does not follow that the eurozone will fare well. On the contrary, it is heading into a deep recession with unemployment projected to rise to more than 10 per cent by 2010.

    So what would a eurozone crisis look like? It would have three elements – financial, economic and political. The financial part would come when some of the weaker economies in the euro area found the markets were increasingly unwilling to finance their budget deficits. When euro-watchers hyperventilate over the “widening of spreads”, this is what they are referring to – the fact that investors are increasingly demanding a higher rate of interest to buy Greek or Italian debt, as compared with debt from the more fiscally continent Germans.

    The crisis in the real economy would involve all the usual malign elements – recession, unemployment, bankruptcy. But there would also be a direct link to the financial problem. As the markets demanded higher interest rates from them, so countries such as Italy, Greece, Spain, Portugal and possibly Ireland would find managing their public finances ever harder. As Mr Tilford of the CER notes: “Membership of the euro insulates countries from the risk of a currency crisis, but currency risk can be replaced by credit risk.”

    Behind this is the broader issue of loss of competitiveness on Europe’s southern fringe. Unable to devalue their currency, weaker economies can only restore competitiveness by cutting jobs and real wages. That is obviously a recipe for social unrest, which leads on to the political crisis. Eurosceptics predict popular upheaval that will eventually force countries to leave the eurozone. Charles Dumas of London-based Lombard Street Research exults that: “Italy will have to leave the euro at some stage. The fundamental fallacy of Emu [economic and monetary union] is revealed by the crisis.”

    Europhiles sigh that this is all absurd. A country that is in financial trouble would be crazy to leave the safe haven of the eurozone. Iceland, after all, is thinking of joining. In their view, the political consequences of the crisis will not be the disintegration of the eurozone or the EU – but ever deeper integration. Arch-federalists, such as Jean-Claude Juncker, the prime minister of Luxembourg, are floating the idea of the “mutualisation” of national debts within the eurozone.

    This would involve the wider euro area assuming the debts of the weaker nations. But, naturally, they would want something in return for this remarkable act of generosity. That something would be that weakling economies would submit to direction from the central authorities of the EU. Bureaucrats from Frankfurt or Brussels would draw up the budgets of Italy or Greece, not their finance ministers. So a crisis would lead not to the disintegration of the eurozone but to the much deeper political union that the euro arguably requires.

    If euro membership forces southern European countries to make deep cuts in their budgets in the midst of a recession – at the behest either of the markets or of Brussels bureaucrats – that sounds like a recipe for a nationalist revolt. British eurosceptics assume that, under such circumstances, the Greeks would smash the crockery and march out of the eurozone.

    But that might be underestimating the deep commitment to European unity on the EU’s southern fringe. Countries such as Italy, Greece, Portugal and Spain are among the most ardently pro-European in the Union. Unlike the grumpy Brits they associate Brussels with good government – and the EU as a whole with prosperity and, even, democracy.

    Yet if the EU itself does not become the target of political unrest, some other part of the political system is bound to come under pressure. In recent months, there have been outbreaks of social unrest in several EU countries, from Latvia to Greece. As times get harder, southern Europeans could turn on Brussels. But it is equally possible that they will direct their fury at politicians closer to home. After all, they are easier to get at.
     
  10. Classic

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    70% of businesses bankrupt? Sounds like that country needs to come up with its own currency and go to more of a bartering economy. 70% is staggering.
     
  11. Deckard

    Deckard Blade Runner
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    How many times have we read about the "ever smaller world, closely tied together, which is our future." Read or heard that in one form or another. We are seeing the pitfalls of that today. It is astounding that the United States isn't being blamed for most of this financial disaster and that the demonstrations are against their own governments, not against ours. After all, it is this country that set things off by allowing the mad deregulation of financial instruments that has led to this crisis.

    What a nightmare for Iceland. I visited there, briefly, and met some Icelanders while traveling in Europe, years ago. Beautiful women!
     
  12. Invisible Fan

    Invisible Fan Member

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    We are being blamed, but they're biting their tongues because our system is also the most capable and efficient of making policy to find a solution to this mess.

    The EU, China, and Japan have their own problems. Unity, credibility, and scale are among them.

    The reckoning could come when the bottom has been felt. By then, our hope is to have our feet on the pavement first.
     
  13. Deckard

    Deckard Blade Runner
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    Well said! I think you nailed it. Let's hope the general population of those countries keep that in mind.
     
  14. Deji McGever

    Deji McGever יליד טקסני

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    When's that :)
     
  15. Invisible Fan

    Invisible Fan Member

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    If I knew, and I had a nickel for every word I spoke...
     
  16. weslinder

    weslinder Member

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    March 6, 2010. You heard it here first.
     
  17. weslinder

    weslinder Member

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    The only thing that has kept Europe from a complete banking collapse so far?

    Drug money
     
  18. pirc1

    pirc1 Member

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    I think I am moving to Mars! :cool:
     
  19. GladiatoRowdy

    GladiatoRowdy Member

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    The Great Depression was a major driver in the repeal of Prohibition. It is interesting that we may be forced to repeal Prohibition II (the War on Drugs) as a result of another financial collapse.

    Maybe there will be a silver lining yet.
     
  20. weslinder

    weslinder Member

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    If we didn't have Drug Prohibition, there wouldn't be all of this drug money to keep some of Europe's banks solvent.


    (I still agree with you.)
     

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