Sept 20, 2011
S&P just downgraded Italy’s credit.
I’ve been warning about Italy since 2008.
The Problem Will Spread Because NONE of the Fundamental Problems Have Been Fixed
None of the fundamental economic problems in Italy or Europe or anywhere else have been addressed … let alone fixed. So the problem will only spread.
Fraud largely caused Italy’s – and Europe’s, and the entire world’s – financial problems.
And as I’ve noted since 2008, shifting the banks’ fraudulent debts onto the nations’ balance sheets only leads to national crises:
The Bank for International Settlements (BIS) is often called the “central banks’ central bank”, as it coordinates transactions between central banks.
BIS points out in a new report that the bank rescue packages have transferred significant risks onto government balance sheets, which is reflected in the corresponding widening of sovereign credit default swaps:
The scope and magnitude of the bank rescue packages also meant that significant risks had been transferred onto government balance sheets. This was particularly apparent in the market for CDS referencing sovereigns involved either in large individual bank rescues or in broad-based support packages for the financial sector, including the United States. While such CDS were thinly traded prior to the announced rescue packages, spreads widened suddenly on increased demand for credit protection, while corresponding financial sector spreads tightened.
In other words, by assuming huge portions of the risk from banks trading in toxic derivatives, and by spending trillions that they don’t have, central banks have put their countries at risk from default.
As I wrote in July:
A study of 124 banking crises by the International Monetary Fund found that propping banks which are only pretending to be solvent hurts the economy:
Existing empirical research has shown that providing assistance to banks and their borrowers can be counterproductive, resulting in increased losses to banks, which often abuse forbearance to take unproductive risks at government expense. The typical result of forbearance is a deeper hole in the net worth of banks, crippling tax burdens to finance bank bailouts, and even more severe credit supply contraction and economic decline than would have occurred in the absence of forbearance.
Cross-country analysis to date also shows that accommodative policy measures (such as substantial liquidity support, explicit government guarantee on financial institutions’ liabilities and forbearance from prudential regulations) tend to be fiscally costly and that these particular policies do not necessarily accelerate the speed of economic recovery.
All too often, central banks privilege stability over cost in the heat of the containment phase: if so, they may too liberally extend loans to an illiquid bank which is almost certain to prove insolvent anyway. Also, closure of a nonviable bank is often delayed for too long, even when there are clear signs of insolvency (Lindgren, 2003). Since bank closures face many obstacles, there is a tendency to rely instead on blanket government guarantees which, if the government’s fiscal and political position makes them credible, can work albeit at the cost of placing the burden on the budget, typically squeezing future provision of needed public services.
Now, Greece, Ireland, Portugal, Spain, Italy and many other European countries – as well as the U.S. and Japan – are facing serious debt crises. We are no longer wealthy enough to keep bailing out the bloated banks.
This article was posted: Tuesday, September 20, 2011 at 3:08 am