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Neither a Borrower nor a Lender Be in Europe
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By Susan C. Walker
Wed, 23 Nov 2011 14:00:00 ET |
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Shakespeare's "Hamlet" reminds us that today's troubles in Europe come down to a simple matter of borrowing and lending gone bad. As Polonius says to his son Laertes:
Neither a borrower nor a lender be,
For loan oft loses both itself and friend,
And borrowing dulls the edge of husbandry.
Neither a borrower...
On the borrowing side, the New York Times reports that "[b]anks clamored for emergency funds from the European Central Bank on Tuesday [Nov. 22], borrowing the most since early 2009 in a clear sign that the euro region’s financial institutions are having trouble obtaining credit at reasonable rates on the open market."
And, yes, borrowing is getting so much harder. For instance, the Times also reports that the Spanish treasury had to more than double the yield on its three-month bills at its latest auction, from 2.29% to 5.31%. Also, the yield on Italy's 10-year bond moved closer to the psychological breakpoint level of 7%. It reached 6.8% on Nov. 22.
Nor a lender be...
As politicians and economists debate how to keep the sovereign debt of Greece, Italy, Spain (and others to be named) from overwhelming the eurozone, some lenders are choosing to simply stop lending. "In particular, American money market funds have severely cut back their lending to European banks in recent months, leading many institutions to turn to Europe’s central bank," reports the New York Times
Our European Financial Forecast editor, Brian Whitmer, warned his readers far in advance about the burgeoning eurozone crisis that has been at the top of the news this month. This excerpt from his most recent European Financial Forecast explains why most eurozone maneuvers are doomed.
The ‘Super-EFSF’ will Fall Super-Short
With respect to the European Financial Stability Facility, we took the following position in August 2011:
"The group of insolvent states that require rescue funding is expanding, while the group of solvent ones that provide such funding is contracting. The unsustainable situation is fast approaching a ruinous climax."
Both groups inched their way toward the precipice in October, as ratings agencies busily cut sovereign credit ratings across the Continent. On the heels of Moody’s two-notch downgrade of Spanish debt, S&P promptly cut Italy’s credit rating and downgraded a slew of large Italian banks. We remain as convinced as ever that the new-and-improved facility will only hasten rather than resolve credit deflation in Europe, because it’s merely giving Europe a bigger pile of debt to suffocate beneath. Just this week, an EFSF spokesman cited market conditions for its decision to delay a €3 billion bond sale to help finance Ireland’s rescue. As one fixed income trader explained to Bloomberg, “The vehicle that’s supposed to borrow on behalf of countries that can’t borrow, can’t borrow.”
After last week’s summit meeting [in late October], moreover, the growing pile of EFSF debt will be a leveraged one to boot — from today’s €170 billion in uncommitted funds to about €1 trillion. This, too, is widely viewed as progress, but leveraging the EFSF will actually put even more pressure on the facility’s guarantors, namely France and Germany, who must maintain its AAA credit rating....
This kind of analysis gives you the foresight to be prepared for not only what is happening in Europe ... but what will also happen in the United States once the debt crisis explodes and affects the global economy. You can get the news before it happens by subscribing to The European Financial Forecast now. Please see below.
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