Home About Archives RSS Feed

Independent Investor: Europe's Banking Crisis

Bill Schmick

Investors are selling first and waiting for the facts later. Few can blame them given their experience in 2008-2009. Investors in the stock market sustained huge losses by naively believing that the financial sector and the government were in control of that crisis. This time around, no one believes anything they say.

The problem is compounded by the fact that this financial crisis is located in Europe where different rules apply, where the political and financial systems are different and where even the time zones play a part. Wednesday's panicked selloff was largely a result of a front-page story in the Wall Street Journal that revealed that the Federal Reserve Bank is scrutinizing the U.S. subsidiaries of all the European banks.

The Fed is worried that Europe's banks, faced with a dwindling supply of cash to pay off loans and remain solvent, are emptying the cash coffers of their U.S. operations. The latest Fed data, according to the WSJ, indicated that over the last three weeks, the cash reserves of these American subsidiaries have declined by 16 percent.

There was also a mention that one European bank borrowed $500 million in a one week loan from the European Central Bank at a higher interest rate than could be borrowed from fellow lenders at a cheaper rate. Investors sold first, assuming that, in at least this one case, some European bank was in deep financial trouble and where there is smoke there is usually fire. The facts do not support that conclusion — at this time. European banks still have massive reserves here, as much as $600 billion or more.

"At this time" is key because Friday the facts could change and during our financial crisis the facts did change, to our detriment, quite often. Because of our recent past, investors have no faith in either government's or the banking community's ability to solve our economic or financial problems. We have even less faith (if that's possible) in the European Union. Some of that disbelief is warranted. After all, the EU is an economic, not a political union. Given that there has never been a successful union that did not incorporate both politics and economy, the Achilles Heal of Europe is now surfacing.

This week the Europeans tried several initiatives that disappointed investors. First, several European nations announced new rules to prevent short selling of their banking stocks. The U.S. did the same thing during our financial crisis which proved to be both short-lived and completely ineffective. Within three days those same banking stocks were down 10 percent or more as investors simply found new ways to sell those stocks.

A meeting between Germany and France on Tuesday had the markets hoping that the two power houses of Europe would announce new, sweeping initiatives that might finally come to grips with the spreading European crisis. Instead, Chancellor Angela Merkel and French President Nicolas Sarkozy proposed that Euro-zone leaders should meet more often and recommended appointing a new Euro-zone chief, but didn't say what kind of power they would have in dictating EU policy. Big deal!

Remember the $157 billion Greek bailout that was supposed to be signed, sealed and delivered? Well, not quite; it appears several nations want cash-strapped Greece to provide cash as collateral in exchange for their participation in the bailout loan. It seems a growing swell of anti-bailout sentiment is rising in an increasing number of countries.

Coupled with these disappointing developments, Germany's most recent GDP second-quarter data indicated annualized growth has slowed to 0.05 percent. That punctured any hope that Germany, whose economy was considered the locomotive of Europe, would continue to support overall growth of the 17 Euro nations. Add a banking crisis, coupled with a deep distrust of existing authority, the increasing fear of a double-dip recession and the lack of political unity equals a continued wave of panic selling.

What could turn this around? A once and for all comprehensive plan by Europe to solve their burgeoning debt crisis might be the answer. But can that be done without addressing the "Elephant in the Room," i.e., political unity? Probably not, if a politically-divided U.S. Congress can't come to an agreement on our economic issues, how hard will it be for the EU to do the same?

Bill Schmick is an independent investor with Berkshire Money Management. (See "About" for more information.) None of the information presented in any of these articles is intended to be and should not be construed as an endorsement of BMM or a solicitation to become a client of BMM. The reader should not assume that any strategies, or specific investments discussed are employed, bought, sold or held by BMM. Direct your inquiries to Bill at (toll free) or e-mail him at wschmick@fairpoint.net . Visit www.afewdollarsmore.com for more of Bill's insights.

0 Comments
Tags: Greece, bailout, Europe, banking crisis      

Support Local News

We show up at hurricanes, budget meetings, high school games, accidents, fires and community events. We show up at celebrations and tragedies and everything in between. We show up so our readers can learn about pivotal events that affect their communities and their lives.

How important is local news to you? You can support independent, unbiased journalism and help iBerkshires grow for as a little as the cost of a cup of coffee a week.

News Headlines
Lanesborough Sets Tax Rate for Fiscal 2021
Some Brayton Students Switch to Remote After Positive Case
Holiday Events and Tree Lightings 2020
North Adams Schools, Departments Hold Annual Food Drive
Pittsfield Fire Victim Flown to Mass General With Severe Burns
City Council Asks Mayor Tyer for 75K to Assist the Homeless
Social Justice Club Explores Mohican History in Stockbridge
Lever Seeks Applicants for Mohawk Trail Entrepreneur Challenge
City Council Appropriates $500k For Tyer's Home Program
In Lanesborough, Williamstown Schools, 'We Over Me' Ethic Promotes Safety
 
 


Categories:
@theMarket (351)
Independent Investor (450)
Retired Investor (22)
Archives:
November 2020 (8)
October 2020 (7)
September 2020 (6)
August 2020 (6)
July 2020 (10)
June 2020 (7)
May 2020 (9)
April 2020 (9)
March 2020 (5)
February 2020 (7)
January 2020 (10)
December 2019 (7)
Tags:
Taxes Recession Greece Currency Euro Fiscal Cliff Banks Oil Wall Street Pullback Bailout Crisis Commodities Election Stock Market Congress Europe Japan Energy Federal Reserve Stimulus Rally Debt Ceiling Europe Jobs Markets Retirement Interest Rates Metals Debt Selloff Economy Stocks Deficit Housing
Popular Entries:
The Independent Investor: Don't Fight the Fed
@theMarket: QE II Supports the Markets
The Independent Investor: Understanding the Foreclosure Scandal
The Independent Investor: Does Cash Mean Currencies?
@theMarket: Markets Are Going Higher
The Independent Investor: General Motors — Back to the Future
@theMarket: Economy Sputters, Stocks Stutter
The Independent Investor: How Will Wall Street II Play on Main Street?
The Independent Investor: Why Are Interest Rates Rising?
The Independent Investor: Will the Municipal Bond Massacre Continue?
Recent Entries:
@theMarket: Market Cyclicals Take the Lead
The Retired Investor: Pandemic Has Been Good to Pet Industry
@theMarket: Markets Are in a Tug of War
The Retired Investor: The Rise of RCEP
@theMarket: Vaccine Hopes Send Stocks Higher
The Retired Investor: Small-Town America Is in Vogue
@theMarket: Markets Enjoy a 'Biden Bounce'
The Retired Investor: Polling Business Takes a Body Blow
The Retired Investor: Food Faces Escalating Prices
@theMarket: Politicians Play Cat & Mouse With Investors