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"In 2007-08, when the financial crisis was still called the "subprime" crisis, Europeans felt superior to the US. European bankers surely knew better than to hand out so-called "NINJA" (no income, no job, no assets) loans. But these days Europeans have little reason to feel smug. Their leaders seem unable to come to grips with the euro zone's debt crisis.
Banks in Ireland and Spain are discovering that their customers are losing their jobs and income as the construction bust hits the national economies. And one could argue that a loan to Greece or Portugal affords little more security than a NINJA loan. Indeed, lending to governments and banks in the European periphery represents the European equivalent of subprime lending in the US."
The article goes on to say that Europeans could learn a lot from our experiences since the crises are very similar in nature. The European banking is very weak and debt problems could lead to a long term crisis beyond the crisis the US faces today.
"Europe is making a fundamental mistake by allowing the two key elements of any resolution of the crisis - debt restructuring and real stress tests for banks - to remain taboo. As long as successive EU summits persist in this mistake, the crisis will fester and spread, eventually threatening the stability of the euro zone's entire financial system."
What do you guys think about the current financial system in Europe? What particular lessons could they learn from the US?
On a fundamental level I find it hard to compare the EU and the U.S, as states within the EU are constrained by debt limitations with which the US is clueless. As for the financial system in Europe I am skeptical to the long term sustainability of a currency union as there is much debate on the program's ability to be successful.
ReplyDeleteFirst of all, thank you for contributing a post that relates directly to our reading. It's nice especially when reading such an intricate book to have current media provide an example-makes it easier to grasp the concepts.
ReplyDeleteAn article in the WSJ today discussed talks for a Portugal bailout. (http://online.wsj.com/article/SB10001424052748703518704576258533817877672.html) What I found interesting was the state of Portugal's government. Currently in power is a temporary government. The country will hold elections in June at which point it's next government will be put together. This Time is Different talked about the significance of a country's willingness to pay vs. it's ability to pay. Aside from the economic threat of the euro-zone crisis and the conditions of a possible bailout, the political uncertainty of the country poses the question of willingness to pay in the future. If a bailout is negotiated with the temporary government, it cannot be guaranteed that the new government elected in June will hold to the bailout's conditions.
Do you think the EU and the IMF should bailout Portugal?
Portugal is only asking for 90 billion euros, what's the big deal?
ReplyDeleteBy comparison, Greece got a little more than 100b and Ireland around 70b, just for some perspective. Portugal’s difficulties admittedly resemble those of Greece and Ireland: for all three countries, adoption of the euro a decade ago meant they had to cede control over their monetary policy, and a sudden increase in the risk premiums that bond markets assigned to their sovereign debt was the immediate trigger for the bailout requests.
Courtesy NY Times:
In the first quarter of 2010, before markets pushed the interest rates on Portuguese bonds upward, the country had one of the best rates of economic recovery in the European Union. On a number of measures — industrial orders, entrepreneurial innovation, high-school achievement and export growth — Portugal has matched or even outpaced its neighbors in Southern and even Western Europe.
Why, then, has Portugal’s debt been downgraded and its economy pushed to the brink? There are two possible explanations. One is ideological skepticism of Portugal’s mixed-economy model, with its publicly supported loans to small businesses, alongside a few big state-owned companies and a robust welfare state. Market fundamentalists detest the Keynesian-style interventions in areas from Portugal’s housing policy — which averted a bubble and preserved the availability of low-cost urban rentals — to its income assistance for the poor.
Why is the Europe afraid of debt restructuring? As we learned in our book, debt is not bad as long as the country is functioning, and Portugal is clearly not.
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