Europe falls deeper into downward spiral — 10/06/11

For Your Information (FYI)

“The medicine being used to cure the financial contagion spreading throughout Europe is killing the patient.
For nearly two years, the richer countries of the region have pressed harder for spending cuts and tax hikes from poorer countries like Greece, already struggling under a crushing debt accumulated when the global economy was booming.
Those measures have sent the entire euro zone sliding into recession, pushing Greece’s neighbors closer to default and European banks that are holding that shaky debt closer to insolvency.
Now, after years of debate and multiple failed efforts, the downward spiral may be impossible to break. By not acting quickly, Europe may have missed its chance to cure the disease, according to Mohamed A. El-Erian, CEO of  PIMCO, one of the world’s largest bond funds.”

“For over a year, European bank regulators have assured the financial markets that the banking system there was strong enough to withstand the spreading contagion. In the past few months, though, it’s become clear that Europe’s bailout fund, cobbled together last year, is nowhere near large enough to backstop debt defaults and bank failures beyond Greece.
“From Day One, people knew this program would not deliver outcomes,” said El-Erian. “This was not about Greece. This was about keeping Greece somewhat stable in order to strengthen the fire walls.”
Now, those firewalls appear to have failed. On Tuesday, France and Belgium moved to bail out Dexia, Europe’s 20th-largest bank by assets. The bank was teetering on the brink of insolvency.
Other European banks are also having trouble raising cash from investors, who worry that they may be the next to go belly up. They have reason for concern. On Wednesday, officials at the International Monetary Fund, a major player in the Greek bailout, repeated warnings that European banks don’t have enough capital to survive a credit squeeze. To compound that problem, European bank regulators this week suggested that bankers may need to take a bigger “haircut” on their debt holdings as the risk of bond default rises.
A year ago, raising capital by selling more stock would have been a relatively easy proposition. But in just the last eight months, European bank stocks have lost 40 percent of their value. Today, investors are much less willing to provide capital — in part because European bank financial statements are much more opaque than their American counterparts.”


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