It is very easy to fall prey to the German view of the European debt crisis: Blame the profligate PIIGS for living beyond their means and borrowing to support a lifestyle based on leisure. There is of course great truth to this but it was the Northern European banks that lent the money in a ready fashion. The GERMAN and DUTCH current account surpluses had to be lent somewhere and with the Chinese and Japanese monopolizing the profligate lifestyles of the Americans, Germany turned to their European comrades. Belonging to the EURO and, thus, ECB zone of finance, Commerzbank, Deutsche Bank, Rabobank and SocGen all felt comfortable buying the AAA debt of Spain and Italy and of course the three little PIGs.
When rates dropped, the AAA rating was so meaningful that the desire to leverage up credit instruments was thought an act of great prudence. The Germans failed to realize the “golden rule of debt”: large surpluses can only be lent to the least creditworthy borrowers. In the late 70s it was the emerging markets that needed to borrow huge sums of money to finance energy imports. It was the OPEC nations that had the huge surpluses and they merely recycled the money through the large U.S. banks, which lent them to the least able borrowers. The formula never changes. Sovereign borrowers are not the AAA credit they are thought to be, especially when the sovereign is naked and has no printing press and limited fiscal authority.
Today, the German Parliament moved to enlarge the capacity of BAFIN, the German financial regulator, so as to have the necessary funds to provide German banks that are under stress. It was an act done to ensure that BAFIN could get ahead of any potential problems. This is interesting because it has been Germany that has acted as a drag on the EUROPEAN INSTITUTIONS’ desire to get ahead of the credit crisis as everything has been an act of “EXTEND AND PRETEND.”
There are rumors circling that the German government is going to have to seize Commerzbank sometime in 2012. Regardless of whether it is Commerzbank or some large French bank, the European financial system is in a hyper state of deleveraging as they try to offload assets to shore up their balance sheets. The entire board this week has resembled the week of March 17, 2008 when Bear Stearns fell into the arms of JPMORGAN. The ECB‘s lack of an aggressive plan is similar to the FED‘s less predicted rate cut at its FOMC meeting of that week. The leverage utilized by the large European banks might initiate a bigger implosion. Oh well, they may have to EXPOSE THE BIG BAZOOKA THAT WE CONTINUOUSLY HEAR ABOUT.
***Today’s most significant news the 50 BASIS POINT INTEREST RATE CUT BY THE NORGES BANK. Norway’s Central Bank surprised the markets with a drop to 1.75% from 2.25%. In the bank’s statement, Deputy Governor Qvigstad noted that the Norwegian economy is robust, but the high degree of uncertainty in the European credit markets were creating borrowing pressures for Norwegian banks.
It appears that the fears of a credit implosion in Europe could precipitate a deflationary spiral. Maybe the Norges Bank should invite Mario Draghi for a day of tutoring on how to actually get ahead of the curve. It seems that the BIG BAZOOKA resides well north of Frankfurt and Brussels. The Norwegian KRONER made 11-month lows against the DOLLAR as the surprise cut managed to further undermine the currency.
***Tomorrow morning 2:30 a.m. CST, the Swiss National Bank announces its interest rate intentions. Rates are expected to remain at the official 25 basis points but some in the market are anticipating the Swiss to raise its floor on the EUR/CHF to 1.25 from 1.20, which would aid the SNB’s desire to weaken the FRANC. I think the SNB will hold its “powder” and look to see what develops in the European debt markets during the holiday-thin markets. If the SNB actually moves it could create a short-term bid to the EURO as SWISS AUTHORITIES step up their EURO PURCHASES. Presently, it would seem to be a waste of money. Pay close attention to the SNB statement to see if there is mention of NEGATIVE INTEREST RATES IN A MOVE TO STEM CAPITAL INFLOWS.
Again, I warn that with the continued outflow of EUROS from PIIGS-BASED BANKS TO SAFER DOMICILES, SOME FORM OF CURRENCY EXCHANGE CONTROLS WILL BE MANDATED. Greek citizens and others are acting very rationally by removing their currency to banks outside the Greek financial system. If DRACHMAS were to become the currency of the realm, better to hoard the more valuable EUROS in an alternative venue: GRESHAM’S LAW AT WORK.