November 28, 2011 Patrick Oliver-Kelley



The odds for a pleasant end to the situation continue to grow long. Policymakers elsewhere are making ready for the autumn. Federal Reserve is preparing to conduct a new round of stress tests on American banks with a euro-area collapse in mind. Treasury officials are looking at big American banks and urging them to cut back their exposure to Europe. The recent failure of MF Global, thanks to euro bets gone bad, seems to have created a sense of urgency among regulators. These preparations are good news for American investors, who watched in 2007 and 2008 as the American government lagged two and three steps behind the rapid progression of the financial crisis. American banks are bad news for Europe. As other economies prepare for euro disaster, their selling will accelerate Europe’s decline.

If Congress fails to extend key stimulative measures, it may saddle a vulnerable economy with a fiscal drag of more than two percentage points of growth.

Europe’s crisis looms larger still. A deep euro-zone recession, which seems increasingly likely, will hurt American firms; roughly a fifth of the country’s exports go to Europe. The impact on the financial system could be the more damaging.

Sadly, it may be a while before the data is again positive.

Consumer spending slowed in October but after Thanksgiving sales, aside from the mayhem, are encouraging. US workers filed more new applications for unemployment benefits, while the pace of layoffs slowed, offering some hope for the weak jobs market. Orders for durable goods continued to fall over the period. Overall, the US jobs recovery has been the slowest since the Great Depression. U.S. manufacturing sector barely expanded in October, following other disappointing factory figures around the world.


ONE can almost hear the gates clanging: one after the other the sources of funding for Europe’s banks are being shut. It is a result of the highly visible run on Europe’s government bond markets, which has reached the heart of the euro zone: an auction of new German bonds failed to generate enough demand for the full amount, causing a drop in bond prices (and prompting the Bundesbank to buy 39% of the bonds offered, according to Reuters). The euro zone is in a death spiral. Markets are abandoning the periphery, including Italy, which is the world’s eighth largest economy and third largest bond market. This is triggering margin calls and leading banks to pull credit from the European market. This in turn damages the European economy, which is already squeezed by the austerity programs adopted in every large euro-zone economy.

Now another run—more hidden, but potentially more dangerous—is taking place: on the continents’ banks. People are not yet queuing up in front of bank branches (except in Latvia’s capital Riga where savers were trying to withdraw money from Krajbanka, a mid-sized bank). But billions of euros are flooding out of Europe’s banking system through bond and money markets.

At best, the result may be a credit crunch that leaves businesses unable to get loans and invest. At worst, some banks may fail—and trigger real bank runs in countries whose shaky public finances have left them ill equipped to prop up their financial institutions.

The chances of the euro zone being smashed apart have risen alarmingly, thanks to financial panic, a rapidly weakening economic outlook and pigheaded brinkmanship. The odds of a safe landing are dwindling fast. Consumers in the 17 countries using the Euro were downbeat about their prospects in November as the currency crisis deepened weakening the outlook for both economies and jobs markets.

3Q, total central bank gold purchases more than doubled the previous quarter and seven times the rate of this time, last year.

Spain raised 2.98bn euros in an auction of three and six month bills, but at higher yields, nearly double to 5.11% from 2.29% in October. What Europe needs is bags and bags of money to strengthen the existing rescue fund, the EFSF. There is however, no more cash to be had, save from some financial engineering.

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