Thursday, August 27, 2009

A Second Credit Crises - European Style

I have been amazed at European strength. You can make an argument that their banking system is (and has been) worse off then ours if that is possible. I have been hearing little snippets from contacts about growing European concern. Nothing concrete, all hearsay. Of course, that is the only thing that would make sense with the dollar going up (until the last half of the day today) the last few days even as the dollar slayer (Ben Bernanke) got full support from Obama. Anyway, I have been expecting much bigger European banking problems for months if not a year and they haven't materialized. I don't know if they are about to now or not so take all this with a grain of salt. The UK Telegraph had an interesting op-ed by Ambrose Evans-Pritchard. You always have to know the source. So you should know that Pritchard hates the EU and has been on the Europe blow up train for several years.

One thing interesting to note is the German elections coming up in September. I have been following this for a couple of months. Germany has worked overtime to push off problems and make things look good for the election. Of course the U.S. did this also and came up just short. Germany may succeed to make it to election day (September 27th). Even if they do, what happens afterward?

From the Telegraph

The finance minister, Peer Steinbrück, said broad sectors of the German economy are in trouble even if the country has avoided a full-blown lending crisis so far.

"Conditions have become much tougher for some industries – electrical engineering, machine tools, suppliers, chemicals and shipbuilding. We have clear evidence from both small and large companies that lending is jammed.

"The banks are not stepping up to their responsibility to provide credit," he told the German paper Handelsblatt.


Mr Steinbrück has now backed away from talk of forcing banks to lend, recognising they have to rebuild their capital, and shifted the focus to direct lending by the state.


While some measures have been discussed before, there appears to be a new urgency. Decisions may be made by "early September".

The comments are hard to reconcile with the a record surge in the IFO business confidence index, which jumped for a fifth month to 90.5 in August. Sentiment is racing ahead of economic hard data.

Axel Weber, the Bundesbank chief and until recently the arch-hawk, last week spoke of a second wave of the credit crisis as home-grown problems come to light, triggered by ratings downgrades that force banks to put aside more capital. "The first round of disruption in the bank balance sheets from structured credit products is behind us. Now we are threatened by stress from our domestic credit industry," he said.

"They are in panic," said Hans Redeker, currency chief at BNP Paribas. "They know the money supply and credit figures coming out are going to be awful." He added that Germany's stimulus measures have put off deep problems until after the election in September. The car scrappage scheme has brought forward demand, implying a cliff-edge drop when the scheme expires. Kurzarbeit (short work) schemes that subsidise companies to keep idle workers on their books are slowly bleeding corporate balance sheets. "This has delayed the restructuring that needs to occur," he said.

Mr Steinbrück said markets are awash with liquidity again, but little is going into the real economy. "The banks evidently prefer to put their money into securities rather then granting new loans because they can get a higher return. After two years of financial crisis the gambler mentality is gaining the upper hand again."

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