EUCOM Economic Analysis - Part I

[Surferbeetle]

Good timing (or maybe, poor), depending upon one's outlook.

Hey Watcher,

I would go with most likely poor for the investors/traders caught in this event, but positive for the rest of the financial system.

Why?

IMHO our/the western political class has cravenly passed on exercising their duties to ensure that the market is able to kill unsustainable enterprises before they became to big to fail, and now the only way left is via nationalization. Voters are also part of this in that we have not exercised appropriate supervision and due diligence of those we have elected. Perhaps Monsieur Hollande will take the opportunity given and do the right thing?

Hopefully his econ team can ensure that the nationalization, breakup, and sale of the remaining assets is a case study in how to repay taxpayer funds plus interest.

Hollande Names Pierre Moscovici As French Finance Minister, By Helene Fouquet and Mark Deen - May 16, 2012 12:33 PM MT Bloomberg News

The young Moscovici started in politics as a supporter of the Communist Revolutionary League and left it in his late twenties for the Socialist Party, where he steadily rose to become one of its leaders and a specialist of European affairs.

Moscovici, like Hollande, studied at France’s elite Institute for Political Sciences and Ecole Nationale d’Administration in Paris. After working for the Socialist Party for several years, he ran for deputy in 1997 in the eastern Doubs region.

Hollande also named Michel Sapin Labor Minister, Laurent Fabius Foreign Minister and Manuel Valls Interior Minister. Jerome Cahuzac will run the budget ministry. For the first time, the French government will have an equal number of men and women in its cabinet, Ayrault said.

You might also remember the recent case of Dexia...France has a significant piece of the the liability associated with that failure as well.

Dexia, from Wikipedia, the free encyclopedia, http://en.wikipedia.org/wiki/Dexia

Dexia N.V./S.A., also referred to as the Dexia Group, is a Belgian-French financial institution active in public finance, providing retail and commercial banking services to individuals and SMEs, asset management, and insurance. The company has about 35,200 members of staff and core shareholders' equity of €19.2 billion as at 31 December 2010, and provides governments and local public finance operators with banking and other financial services. Asset Management and Services provides asset management, investor and insurance services, in particular to clients of the two other business lines. In 2008, the bank received bailouts for €6 billion, and it has become the first casualty of the 2011 European sovereign debt crisis. Negotiations are taking place for its breakup.[2] Its headquarters are in Saint-Josse-ten-Noode, Brussels.[3]

Fortis is a 2008 casualty worth looking at.

Fortis (finance), from Wikipedia, the free encyclopedia
http://en.wikipedia.org/wiki/Fortis_(finance)

Fortis N.V./S.A. was a company active in insurance, banking and investment management. In 2007 it was the 20th largest business in the world by revenue[1] but after encountering severe problems in the financial crisis of 2008, most of the company was sold in parts, with only insurance activities remaining.

The Benelux countries were Fortis's home base and its strength. Fortis's banking operations included network (retail), commercial, and merchant banking; its insurance products included life, health, and property/casualty lines. Products were sold through independent agents, brokers and financial planners, and through branches of Fortis Bank. It was listed on the Euronext Brussels, Euronext Amsterdam, and Luxembourg stock exchanges.

The company was broken up after having critical difficulty financing its part of a joint acquisition of ABN AMRO (as a member of a consortium which also included Royal Bank of Scotland Group and Banco Santander). After receiving a bailout from the Benelux governments, its Belgian banking operations were sold to BNP Paribas, while its insurance and banking subsidiaries in the Netherlands were nationalised by the Dutch government and renamed ABN AMRO. The Dutch insurance arm of Fortis was split off as ASR Nederland.[2]

Fortis retained the rest of its insurance operations (remaining the largest provider in Belgium),[3] and changed its name to Ageas in April 2010, with ownership of the Fortis brand having passed to BNP Paribas.[3]

@ Fuchs,

The Great Depression was an example of relatively quickly clearing the market of malinvestments while Japan's 'Lost Decade' is an example of a more controlled clearing process.

Tough choices either way...

[Watcher In The Middle]

"Hopefully his econ team can ensure that the nationalization, breakup, and sale of the remaining assets is a case study in how to repay taxpayer funds plus interest."

Actually, I agree fully with this approach. It's what we should have done here in the US (except not to nationalize, but make them file Chapter 11/Chapter 7 in federal bankruptcy court). And then we should have kicked out all the upper level management in disgrace (& board of directors), and then assigned a task force of special prosecutors to look into each occurrence.

But we didn't do that, and we've been paying for it ever since (undoubtedly, with more to come).

France in particular needs to get to the bottom of this entire real estate mortgage crisis really fast and decisively, because otherwise, you just might see France turn into "Spain, Part II". Don't do like the US is doing -trying to 'push it all down the road'.

[M-A Lagrange]

France in particular needs to get to the bottom of this entire real estate mortgage crisis really fast and decisively, because otherwise, you just might see France turn into "Spain, Part II". Don't do like the US is doing -trying to 'push it all down the road'.

Makes too long I'm not living in France so I don't really see where you are coming from. If it's true that real estate market in France is getting a little crazy, I do not believe you can compare the situation to Spain. If real estate is too expensive in Paris, it remains accessible in "province". Also, it's a hell to get a credit from the banks. The problem is more that banks do not play their role anymore by refusing to allow grants to small enterprises. This basically kills a lot of business, even if they are health but need cash to fund their growth.

but i might be wrong.

[Firn]

Well almost all banks are indeed greedy when others are greedy and fearful when others are fearful. It is just all too human and at the same time a strange case of Dr Jekyll and Mr Hyde. Only that both extremes will make the economy suffer be it a couple of years down the road or now.

@Surferbeetle: Banks are unique institutions as when many a banca becomes rotta the economy suffers greatly. As we have seen in dire times it is the citizien who covers the downs of those big banks while he has little from the ups. I believe we really should give a nod to the law of medieval Genua and literally break the big banks, but in away that the pieces can stand on their own feet.

[Fuchs]

@Surferbeetle: Banks are unique institutions as when many a banca becomes rotta the economy suffers greatly.

It depends. The real economy had been complacent about the leeches in the financial industry and the big consulting firms, but since the crisis began they broke largely free from the banks.

Large corporations not only have a lot of liquidity - they also have their own means to emit bonds and such for foreign capital.

Small businesses have always been better off by dealing with regional savings & loan institutions instead of with the big banks.

Medium-sized companies are in between.


The real economy did its job of mitigating the risks of association with the big banks to the point that German big banks are now desperately in search for large loan customers. These well-done homeworks may be part of the reason why the German economy can now grow faster than long term average (which would be in real terms: working age population growth about -0.5% + annual technological progress rate about +1.5% = 1% p.a. total at most since the capital stock doesn't change much).

[Surferbeetle]

@ Firn

Banks have been vital to financing large engineering efforts for aeons; the Assyrians had them back when. Speaking of which there was a Tel outside of Mosul with amazing views of the Tigris and incredible work (way too heavy to carry by even a team of rapists of history) that must have been quite the amalgam of engineering, politics, and finance of pull off and build ... Eurobonds will be interesting to watch and see what results.

@ Fuchs

The distinctions between large, medium, and small banks are perhaps not as clear cut as one might think....and to stir the pot a bit, simplifying...Krugman thinks TBTF can work if managed while Greenspan thinks killing some TBTF off is not a bad thing...

The Economist has a timely multi-section report on Banking worth reading:

Special report: international banking: Banking goes digital, May 17th 2012, 4:46 from Schumpeter, Our correspondents discuss how new technologies will affect the future of retail banking, The Economist

Spain is arguably the world’s most competitive banking market. Thanks to its fiercely independent regions, it has a remarkable number of banks for its size. Even more remarkable is the number of branches, some 43,000, which works out at one branch for every 1,000 people, or about six times the number in Britain and more than twice as many as in France and America. “With too many players you end up overbanked because every bank wants to be everywhere,” says Pedro Rodeia at McKinsey. This keen competition pushed some smaller banks to lend recklessly, causing a banking crisis that blew up the economy. Yet it also forced banks to squeeze out costs, which at Santander and BBVA account for less than 50 cents of every euro they earn, despite their huge branch networks. Most large retail banks in other countries would be happy with anything below 60 cents.

Spanish banks embraced modernisation relatively late. Having been trapped in a bubble for many years during the fascist dictatorship, once they were freed they were able to leapfrog rivals in more developed markets. The most important innovation was the rapid and almost universal adoption by bank customers of electronic bill payments. Spain’s banks have a huge advantage in not having to process cheques or handle transactions in their branches. They have invested diligently in installing the latest and most effective computer systems, making their banks enviably efficient. Their rapid growth and the economic troubles at home raise some question marks. Even so, they have developed an innovative model of banking that is being exported around the world. It may also hold some clues about what banks elsewhere may soon be doing.

[Firn]

@ Firn

Banks have been vital to financing large engineering efforts for aeons; the Assyrians had them back when. Speaking of which there was a Tel outside of Mosul with amazing views of the Tigris and incredible work (way too heavy to carry by even a team of rapists of history) that must have been quite the amalgam of engineering, politics, and finance of pull off and build ... Eurobonds will be interesting to watch and see what results.

An amalgam of engineering, politics and finance to build a palace for a reign who staked its claims with captured enemies. They certainly wanted to spread the word of their deeds. The Sumerian merchants trying to account for their goods could not knew that once those marks would enable the Assyrian kings to tell us how they slaughtered the sons of this and that lord in front of his eyes. Or the amount of tribute they collected.

Thankfully the situation in the Eurozone is not quite that grim, and the stronger nations are not plundering the weakest one but are sending money, if with strings attached.

As some of you recall I still hold Greek bonds which lost relative little in nominal value. If Greeces does split from the Eurozone I'm quite sure that this credit will at best worth only a third of its current value. With the GDP measured in neodrachma the debt in Euro would be north of 300% I guess, and that after the famous haircut. Too much even for a far stronger country.