19th July 2011, 10:57 clock
Global Currency Crisis
Who can save the world from financial Armageddon?
By Henrik Müller
Europe is facing a debt trap, as the U.S. - the next global financial disaster is taking on ever more threatening dimensions. Now can only help the banks. But the price for the rescue will be very high.
Hamburg - It looks as though the endgame began. Not just the euro but to the international financial system as a whole. That may seem excessive at first glance. But the facts can expect bad things:
1. The U.S. is flirting with a state bankruptcy . Even if it still should come to an agreement, America's credit rating will remain through the last weeks of retching permanently damaged.
2. In Europe, the crisis of confidence takes over from the edge to the core of the monetary union. The fact that Italy is in serious problems , represents a turning point: A country of this size can not stabilize with the previous reserve chutes.
3. The democratic systems in many Western countries are paralyzed. Financially and politically maneuver seem exhausted.
As the only state institutions nor the banks are able to act. But her margin will gradually narrow.
Where is it all leading?
The danger is that there is a global meltdown - that the revaluation brings the U.S. and European government bonds in the incredible amount of € 20 trillion together around the globe, banks, insurance companies, shadow, and central banks in distress. At the end of such a development is not only government bonds would be worth much less, but many other assets.
Certainly, so far we have not yet. It is still possible that can avoid the scenario of a financial "Armageddon" (Barack Obama) by far-sighted political management. But anyone who followed the course of events will have no choice but to see a meltdown as logical endpoint of the previous development.
Let's start with the U.S.. Well, it is still possible that President Barack Obama and the Republican majority in Congress until the end of July but still get a deal concluded so that the country can avoid defaulting. But such a compromise that will calm markets only briefly: First, the shock runs deep that the escalation could even go so far. On the other hand, there will be no viable long-term agreement between the downright hostile political camps.
Even after an agreement will remain uncertainty about the future course of the United States. America, so it seems, will stagger on for the foreseeable future on the edge of its fiscal ways - and not primarily because the debt is so high, but because the tax revenues of Washington are grotesquely low by international standards and the tax system happened to sound almost archaic (for example, there is no profitable value-added tax, as is otherwise virtually everywhere in the developed world).
Therefore, the rating agencies can hardly be otherwise, as to lower the credit rating of the United States. A dramatic turning point: Half the world has its surpluses in U.S. Treasury bonds, which created (so far) the safest and most liquid asset class on the globe. If these bonds following a downgrade to lose value, which would trigger a wave of write-downs in the financial statements. Many institutions and other institutions would respond and collect receivables; banks would restrict their lending, for example - which would further dampen the already weak real economy.
Similar to the situation in Europe. Since Italy has come to the attention of financial markets - that would have occurred without at the fundamentals worsening - even on this side of the Atlantic, threatening a chain reaction. A sudden rise in interest rates in Italy can bring the highly indebted, but stable economy to the brink of insolvency. The public debt of around 1.9 billion € are too high to Italy that could be easily saved by the Euro-partners over the drip shields. After all, which would be due, would also endanger the creditworthiness of Germany and France.
Which plants are they still safe?
Since there can be no salvation through the screens, Italy threatens downgrades by the rating agencies. That a further chain reaction sets in motion: Investors who hold only high quality papers would then repel Italian bonds - and next, perhaps Spanish, Belgian ... and so on. As in the case of a U.S. downgrade would lead to a wave of depreciation. With the known consequences.
Accelerate the debt spiral by the political momentum is on both sides of the Atlantic. To date, the Western democracies patch up political and social plans by spending money. Now they come in the face of ongoing budget constraints at the boundaries of their act.
How difficult is it to bridge political divisions is seen in many countries - from the USA to Greece. Even in Germany (where it is due to the euro rescue package within the government coalition), Austria (where the Freedom Party, the Grand Coalition in front of him hertreibt) and Finland (where the party makes the "True Finns" from the right pressure) to stable governments are weakened. And in France, even the election of National Front leader, Marine Le Pen to the State President in the coming year seem inconceivable.
The longer and more severe the economic crisis, the greater the social and political polarization - the more difficult a solution. Thus, the economic crisis will continue to gain momentum.
And now?
Now, actually, only the central bank fully capable of acting. The assumption is that they - will jump in if the interest rate on government bonds rise sharply - contrary to assurances otherwise. Not because they want them but because in the end nothing else left.
If the banks need to make large write-offs, they are forced to scale back their loans, the economy can then easily slide into a credit crunch and in a very painful debt deflation. This very ugly scenario must prevent the central banks with a vengeance - they will buy bonds in order to press the long-term interest rates. It then runs under euphemisms such as "quantitative easing" (Fed) or "Programs Securities Market" (European Central Bank).
Although both major central banks to purchase programs for government bonds have actually stopped to protect its independence and credibility. But this line they are in further progress of the crisis can hardly hold. Then they will face the question: Which is more important to us goal - monetary stability and financial stability?
The answer will be clear: Nobody wants to be blamed for a complete breakdown. So they are as long as it possibly can to support the bond markets. If Italy to the brink of insolvency device, including the European Central Bank (ECB) can not fail to buy Italian bonds.
Save us, the central banks facing financial Armageddon?
For a while, maybe. But the more the quality of bonds disappears - the further erode the creditworthiness of countries - the more the banks got into the terminal. Eventually they would swap worthless assets for cash.
In the Greek case is that before even short: If there is a default and Greek bonds on the credit quality step "default" ("default") to be downgraded, the ECB would have either worthless securities accepted as collateral - or the Greek banks could no longer refinance with her and would collapse. No wonder that the ECB resists tooth and nail against a Hellenic state bankruptcy.
Completely detached from the real economy, the central banks would flood the economy with money and solve the debt crisis of the biggest story on proven ways: by inflation.
If at some point, prices begin to rise, the central banks are considering its bloated balance sheets, inflation dynamics can hardly catch again. The consequences: debt would be devalued currencies ruined.
Then begins a new game. According to new rules - maybe the Chinese.
Global Currency Crisis
Who can save the world from financial Armageddon?
By Henrik Müller
Europe is facing a debt trap, as the U.S. - the next global financial disaster is taking on ever more threatening dimensions. Now can only help the banks. But the price for the rescue will be very high.
Hamburg - It looks as though the endgame began. Not just the euro but to the international financial system as a whole. That may seem excessive at first glance. But the facts can expect bad things:
1. The U.S. is flirting with a state bankruptcy . Even if it still should come to an agreement, America's credit rating will remain through the last weeks of retching permanently damaged.
2. In Europe, the crisis of confidence takes over from the edge to the core of the monetary union. The fact that Italy is in serious problems , represents a turning point: A country of this size can not stabilize with the previous reserve chutes.
3. The democratic systems in many Western countries are paralyzed. Financially and politically maneuver seem exhausted.
As the only state institutions nor the banks are able to act. But her margin will gradually narrow.
Where is it all leading?
The danger is that there is a global meltdown - that the revaluation brings the U.S. and European government bonds in the incredible amount of € 20 trillion together around the globe, banks, insurance companies, shadow, and central banks in distress. At the end of such a development is not only government bonds would be worth much less, but many other assets.
Certainly, so far we have not yet. It is still possible that can avoid the scenario of a financial "Armageddon" (Barack Obama) by far-sighted political management. But anyone who followed the course of events will have no choice but to see a meltdown as logical endpoint of the previous development.
Let's start with the U.S.. Well, it is still possible that President Barack Obama and the Republican majority in Congress until the end of July but still get a deal concluded so that the country can avoid defaulting. But such a compromise that will calm markets only briefly: First, the shock runs deep that the escalation could even go so far. On the other hand, there will be no viable long-term agreement between the downright hostile political camps.
Even after an agreement will remain uncertainty about the future course of the United States. America, so it seems, will stagger on for the foreseeable future on the edge of its fiscal ways - and not primarily because the debt is so high, but because the tax revenues of Washington are grotesquely low by international standards and the tax system happened to sound almost archaic (for example, there is no profitable value-added tax, as is otherwise virtually everywhere in the developed world).
Therefore, the rating agencies can hardly be otherwise, as to lower the credit rating of the United States. A dramatic turning point: Half the world has its surpluses in U.S. Treasury bonds, which created (so far) the safest and most liquid asset class on the globe. If these bonds following a downgrade to lose value, which would trigger a wave of write-downs in the financial statements. Many institutions and other institutions would respond and collect receivables; banks would restrict their lending, for example - which would further dampen the already weak real economy.
Similar to the situation in Europe. Since Italy has come to the attention of financial markets - that would have occurred without at the fundamentals worsening - even on this side of the Atlantic, threatening a chain reaction. A sudden rise in interest rates in Italy can bring the highly indebted, but stable economy to the brink of insolvency. The public debt of around 1.9 billion € are too high to Italy that could be easily saved by the Euro-partners over the drip shields. After all, which would be due, would also endanger the creditworthiness of Germany and France.
Which plants are they still safe?
Since there can be no salvation through the screens, Italy threatens downgrades by the rating agencies. That a further chain reaction sets in motion: Investors who hold only high quality papers would then repel Italian bonds - and next, perhaps Spanish, Belgian ... and so on. As in the case of a U.S. downgrade would lead to a wave of depreciation. With the known consequences.
Accelerate the debt spiral by the political momentum is on both sides of the Atlantic. To date, the Western democracies patch up political and social plans by spending money. Now they come in the face of ongoing budget constraints at the boundaries of their act.
How difficult is it to bridge political divisions is seen in many countries - from the USA to Greece. Even in Germany (where it is due to the euro rescue package within the government coalition), Austria (where the Freedom Party, the Grand Coalition in front of him hertreibt) and Finland (where the party makes the "True Finns" from the right pressure) to stable governments are weakened. And in France, even the election of National Front leader, Marine Le Pen to the State President in the coming year seem inconceivable.
The longer and more severe the economic crisis, the greater the social and political polarization - the more difficult a solution. Thus, the economic crisis will continue to gain momentum.
And now?
Now, actually, only the central bank fully capable of acting. The assumption is that they - will jump in if the interest rate on government bonds rise sharply - contrary to assurances otherwise. Not because they want them but because in the end nothing else left.
If the banks need to make large write-offs, they are forced to scale back their loans, the economy can then easily slide into a credit crunch and in a very painful debt deflation. This very ugly scenario must prevent the central banks with a vengeance - they will buy bonds in order to press the long-term interest rates. It then runs under euphemisms such as "quantitative easing" (Fed) or "Programs Securities Market" (European Central Bank).
Although both major central banks to purchase programs for government bonds have actually stopped to protect its independence and credibility. But this line they are in further progress of the crisis can hardly hold. Then they will face the question: Which is more important to us goal - monetary stability and financial stability?
The answer will be clear: Nobody wants to be blamed for a complete breakdown. So they are as long as it possibly can to support the bond markets. If Italy to the brink of insolvency device, including the European Central Bank (ECB) can not fail to buy Italian bonds.
Save us, the central banks facing financial Armageddon?
For a while, maybe. But the more the quality of bonds disappears - the further erode the creditworthiness of countries - the more the banks got into the terminal. Eventually they would swap worthless assets for cash.
In the Greek case is that before even short: If there is a default and Greek bonds on the credit quality step "default" ("default") to be downgraded, the ECB would have either worthless securities accepted as collateral - or the Greek banks could no longer refinance with her and would collapse. No wonder that the ECB resists tooth and nail against a Hellenic state bankruptcy.
Completely detached from the real economy, the central banks would flood the economy with money and solve the debt crisis of the biggest story on proven ways: by inflation.
If at some point, prices begin to rise, the central banks are considering its bloated balance sheets, inflation dynamics can hardly catch again. The consequences: debt would be devalued currencies ruined.
Then begins a new game. According to new rules - maybe the Chinese.