More on the European Financial Crisis

I was on the CBC’s hour-long primetime finance show Lang & O’Leary last week talking about the European financial crisis. Prior to my appearance I wrote "The European Sovereign Debt Crisis" to give a full accounting of the main issues.  A link to the video is below but here’s what we said on the show.

1. There will be sovereign defaults in the euro zone. Greece is a foregone conclusion. Ireland and Portugal are possible too.
2. Austerity won’t work: the road to recovery through internal devaluation (decreasing wages and prices) is politically much harder than external devaluation (decreasing the currency’s external value). The contrast between Ireland and Iceland demonstrates this.
3. Fiscal transfers would make austerity more palatable.
4. The sovereign debt crisis is a bank crisis because the financial sector in Europe is poorly regulated (Germany comes to mind).  European institutions lent recklessly during the bubble period. European banks are overleveraged. Now the question goes to who must take the losses to prevent systemic risk. Will it be taxpayers or creditors and lenders? That’s really what the crisis is about.
5. Right now, the approach seems to be extend and pretend. That’s what the stress tests were about. This leads to crisis. The preferred solution would be dealing with the banking sector now rather than extending the life of toxic assets on bank balance sheets and pretending the losses don’t exist.
6. The trigger for crisis could be Spain. The EU rescue fund is not large enough to deal with Spain’s problems. The preferred solution for Spain is to write down toxic assets, letting some institutions fail with creditors taking the losses instead of taxpayers as we saw in Ireland.

The whole hour of the Lang & O’Leary show is a good watch. Catch me and the other guest speaker, Ian Lee of the Sprott School of Business, at about the 34 minute mark.

Cheers. Enjoy.

(click on image for video)