Guest Post: 2008 Financial Crisis The European Sequel

Tyler Durden's picture

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2008 Financial Crisis The European Sequel

The European Union is facing a similar set of events as those leading up to the 2008 US financial crisis.  In 2007/08 the US economy was teetering on the brink of recession and the talk among many was that of a goldilocks soft landing. Economic data was still somewhat positive including job growth while equity markets were still holding up. The housing market was beginning to show signs of exhaustion.  Manufacturers were confronting rising input costs while consumers were paying more at the pump. The Federal Reserve introduced a new chairman who tried to calm markets with his infamous quote on March 28, 2007, "the impact on the broader economy and financial markets of the problems in the subprime markets seems likely to be contained."

Today Europe is faced with a subprime crisis of their own in terms of sovereign debt.  Greece and Ireland have been bailed out and Portugal is only weeks from joining the esteemed list.  Spain and Italy are a shock event away from joining as well.  The EU also has their overconfident leadership as witnessed by the ECB Chief Economist Jurgen Stark on July 9, 2010 "The worst is over” (for Europe’s sovereign debt crisis). 

According to a 2009 BIS report EU creditors had over 1.5 trillion euros in exposure to Spain, Ireland, Portugal and Greece.  Of that amount, Germany and France accounted for 493 billion euros and 465 euros respectively. This is not a PIIGS "problem."  In reality the debtors have equal or greater negotiating power over the creditors.  TARP bailed out the insolvent banks at the expense of the taxpayer while the EFSF is bailing out the German and French banks at the expense of the PIIGS taxpayer.  The similarities don't stop though.

The EU produced positive economic data in the latter part of 2010 while the euro was trading on average 1.28 (eur/usd).  Over the past six months the euro has traded 6% higher at 1.36 which will reverse that positive trend.  The impact of a rising euro on export driven economies like Germany which have been the only real source of growth in the EU will be negative.  Rising input costs have been a worldwide phenomenon of late and the EU is not immune.  Watch for shrinking corporate profits in the near future.  The consumer is not immune either as record gas prices are now hitting the pumps across the EU.  What will the shock event be though?  In 2008 it was Lehman. 

The US was able to delay the inevitable after Bear Stearns and so did the EU with Greece.  Will Ireland be the Lehman failure that forces a massive hit to creditor and not taxpayer balance sheets?  If so it will force a similar credit contraction among various credit facilities from commercial paper, interbank lending and more as witnessed in the US in 2008.  In July 2008 oil was moving up very quickly until topping at 147 on July 14 (Bastille day, another similarity), just months before Lehman failed.  Today as the global economy faces rising oil prices, the impact on the EU are far greater with Ireland and Italy alone importing over 20% of oil from Libya.  With Libyan oil production all but shutdown, it is arguable that $147 oil has already arrived.

The US economy will not be immune to a sovereign debt crisis as the EU was not immune to the subprime crisis.  It is not a "Greek debt problem" nor is it a "Middle East problem."  The world is more connected today than ever before in history.  We have seen this movie before and as we all know the sequel is usually far worse than the original. 

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THE DORK OF CORK's picture

Not to worry - I believe our oil consumption is crashing as the money supply fades.

Although I find it hard to get decent energy stats in Ireland for the last couple of years.

 I think the European plan is to offset Asian consumption increases with Irish austerity and therefore keep the paddies in quarantine on our Island prison.

Although I reckon the Brits are getting a bit worried about a refugee crisis.

Need more sacrifi.................. ...... .


IQ 145's picture

 There is no European plan. never impute a conspiracy when simple foolishness will explain the facts.

THE DORK OF CORK's picture

I was taking the piss on that one - even if they drive us into a new famine we could not offset Asian consumption increases.

Although our polticians will try it if they are given the nod from the various cardinals.

Spalding_Smailes's picture


I see the dollar catching a bid ....


European debt crisis back in spotlight


“The clock is now ticking on … Portugal, which is under suspicion by the markets merely because something might go wrong in its public finances,” Carl Weinberg, chief economist at High Frequency Economics in Valhalla, N.Y., said in a note. “Had the EU governments demonstrated that they knew what to do to really fix Greece and Ireland, then everyone would be confident that Portugal’s potential woes could be easily managed.”

The Portuguese government’s sale of a €1-billion ($1.34-billion) issue of two-year notes at auction Wednesday came at a steep cost. The 5.99 per cent interest rate demanded by investors was the highest the government has had to pay for two-year debt since the country joined the euro zone in 1999. Investors settled for 4 per cent in a similar auction last September. By comparison, two-year notes issued by Germany, considered by far the safest of the euro pack, recently changed hands at a rate below 1.8 per cent.

The yield on 10-year Portuguese bonds has not fallen below 7 per cent in nearly a month. And despite assurances from Lisbon, analysts say the government will have tough sledding if it is forced to pay such punitive rates to meet financing needs this year of €20-billion. The government will have to fork out €3.3-billion to cover maturing treasury bills next week; and a €4.3 billion issue of long-term bonds comes due next month.

High bond yields in Europe show global investors see relatively high risks. Lebanon’s 10-year bond carries a lower risk premium than Portugal, and even Egypt (6.85 per cent for a nine-year bond) is regarded as a safer bet. With a 10-year rate hovering above 12 per cent, Greece is now in similar company to such financial basket-cases as Pakistan (14.3 per cent).


Bleeping Fed's picture

March 11.  D-day.

max2205's picture

italy buys at the margin

Yes_Questions's picture

Today Europe is faced with a subprime crisis of their own in terms of sovereign debt.

And the Irish look ready to pull a Strategic Default, sans the jingle mail and voluntary abandonment.



infiniti's picture

I've read that millions have fled Ireland over the past few years. Given the prospect of being an eternal debt slave, more will leave.

Voluntary abandonment, without the FICO hit.



IQ 145's picture

 There is no such thing as a subprime crisis in terms of sovereign debt. You might as well talk about asparagus and rabbits. The one thing has nothing to do with the other. This is journalism. Think critically and carefully.

Raynja's picture

They are both weak debtors that will endanger their 'strong' creditors. Think carefully and critically.

Fidel Sarcastro's picture

"The impact on the broader economy and financial markets of the problems in the subprime markets seems likely to be contained." - Bermonkey, leader of the Bannana Republic.

Cow's picture

Evidently, there is no financial crisis in Europe.  The European Union will spend €270 billion ($375 billion) a year to cut greenhouse gas emissions by at least 80 percent by 2050 compared to 1990 levels.

Is this The Onion?  Jeesh!



IQ 145's picture

 This is inflationary, (and insane); but not evidence of a "crisis". It's merely human beings doing what they do best; fucking up.

Id fight Gandhi's picture

So when portugal gets a bailout everyone will cheer it and rally the market?

Portugal 10 yr is 7.65% Italy is 5% and Greece is way up at 13%.

Anything over 7% for a period of time makes the debt hard to service and bailout comes.

So will they just up the ecb fund another trillion euro to solve this?

Instant Karma's picture

The ECB is going to have to print A LOT MORE EUROS!

Call The Bernanke for tips.

IQ 145's picture

 I am short the Euro on the EUR/USD contract basis June from 1.3965; although there was no possible suggestion that this was a good idea when I put the trade on, Friday Morning. We will see how this works out. There are importalnt and influential people in Germany who do not "like" a $1.40 Euro. The speculators make as money on the short side as on the long side, etc. We will see. In the long run, as Dr. Faber says, all the currecnies are doomed.

Zero Govt's picture

Look Trichet has "stopped contagion in Europe" just like the senile French windbag said he would. In fact just like Clown Prince crone Timmay Geithner said "US States are not like Europe" there's no problem or even hint of a shambolic meltdown in Munis.

All is fuking well . . . . . . . . . . (gulp!)

So I don't know what this hysterically all too accurate article is gibbering on about! Is it Merideth Whitney behind this just publicity seeking again? Let's have the truth seeking bitch up in front of the unelected unaccountable marxists of the ECB at Commie HQ in falling-apart at the seems Brussels (credibility escapes from every EU pore!). We're not having our incompetent rotten sham of a Banana Euro Republic questioned by pesky citizens who can do maths.

So on with our Clown Show, Pretend & Extend, onto Bank Stress Test II (well 'I' fell apart in mere minutes!) no point dwelling on our last complete absolute farce now is there?

sangell's picture

Change the names and the stories pretty much the same for the US. California could be Spain and New Jersey and Illinois Greece and Portugal. Problem is as hard as I look I can't find anything we could call Germany in the US. How about Canada?

Zero Govt's picture

You can call Canada 'Germany' if Canada has squandered all its industrially created wealth  extending massive loans to a bunch of frauds (Greece etc) and losers (Ireland, Spain etc) via the usual political morons and bwanking retards.

Don't think for a minute Germanys political-banking elite are any less dumb-arsed stupid than anywhere else in the Western world... this is a house of credit cards, one goes they all collapse like a sack of Euro-socialist crap

snowball777's picture

It's called North Dakota.

IQ 145's picture

 Wisconsin. precision manufacturing and a lot of ethnic germans. doomed; but later.

IQ 145's picture

 Wisconsin. precision manufacturing and a lot of ethnic germans. doomed; but later.

IQ 145's picture

 Wisconsin. precision manufacturing and a lot of ethnic germans. doomed; but later.

IQ 145's picture

 Wisconsin. precision manufacturing and a lot of ethnic germans. doomed; but later.

IQ 145's picture

 Wisconsin. precision manufacturing and a lot of ethnic germans. doomed; but later.

Weimar Ben Bernanke's picture

The EU was a failed experiment that was unrealistic. The only way to fix this problem is for the EU to be a federation. However nationalism in Germany,UK,Spain,France,Portugal are on the rise. These governments may have invested much in the EU it will fail the same way the USSR did. I will  shed no tears when the EU implodes. When it falls it will be a blow against those who do not respect national sovereignty. Spain will the straw that will break the EU's back.

ml8ml8's picture

It will be interesting to watch the ECB begin lurching from event to event just like our Treasury and Fed did in 2007-2008, along with lots of Sunday night announcements.  

Japan is the 5th PIIG.  Say what you want about "net" debt, the numbers just don't pan out there, either, and Japan are far more interconnected to the global financial system and just BIGGER.  I expect Japan to quietly begin it's death spiral perhaps even as the events in Europe are unfolding in what amounts to a distraction. 

PIMCO has already gone to cash.  Why?  Icahn is liquidating his hedge fund.  Why?  What do these massive capital liquidations have in common? 

Answer:  They know a system wide run lies in the offing, and they are the first ones in line at the bank withdrawing their funds...

Caviar Emptor's picture

Perhaps we should call this moment Schaden_Nostalgia ! (?Schaden_Jung?)

It all began innocently enough: In June, 2007 Bear Stearns High-Grade Structured Credit Strategies and High-Grade Structured Credit Strategies Enhanced Leveraged Funds imploded. Together they managed a piddling $20 Billion. When Bear suggested that creditors take a small haircut, Merrill Lynch refused and tried to sell a piddling $850 million in collateral. When Merrill tried to sell the assets (subprime CDOs), they received no bids on the low grade stuff, and at best 85 cents on the dollar for the best. Some other investors then panicked and offered to sell their assets at 11 cents on the dollar. The highest bid was 5 cents. And so the process of slowly waking up from a  drug-induced dream began for Wall Street, the US economy and the world

tom a taxpayer's picture

Yes. Bear Stearns...the canary in the coal mine.

Or, the butterfly in the ointment.

"The butterfly effect is a metaphor that encapsulates the concept of sensitive dependence on initial conditions in chaos theory; namely, a small change at one place in a complex system can have large effects elsewhere."

Augustus's picture

TARP liquified the banks.  Calling it a bailout is simply not a fair analysis.  Note that the TARP funds have been mostly repaid and the Taxpayer has earned a profit from the transactions, except for the funds going to the GSE's and Govt. Motors.

What the ECB has done is not at all the same.  There is no hope for repayment in full, forget a profit, on the bonds the ECB has purchased of the PIIG countries.  It makes the article a nonstarter analysis.

snowball777's picture

Do let us know when that 'liquification' is 'sterilized'.

Caviar Emptor's picture

TARP liquified the banks.  Calling it a bailout is simply not a fair analysis. 

A bailout because they would have had to shut their doors without it. A bailout because it let the government and Wall Street act in restraint of trade by picking winners and losers and preventing competition. A bailout because it in fact was temporary nationalization of the banking system. Not capitalism. The taxpayer lost big time on the deal because of the opportunity cost: the chance to have channeled the funds into other productive endeavors. And because the ongoing bailout of banks has had consequences on the economy: low growth and high unemployment for as far as the eye can see. 

ivars's picture

With Brent going up sharply again, we are in for second peak in this graph,

commencing yesterday, and peaking at around April 1st with Brent crude STABLE above 125 USD, with a possible short spike to 135 USD somewhere near the top.

After that, another downturn to during May Brent 110-115, and then, in June-July upturn to 140-150 USD peak. It gets worse after that in Autumn, but that July oil is a turning point. The scale on the graph is 5-8% below what is really happening, but , if USD strengthens, may be realistic. USD will strengthen still in 2011. Its curreny in which military protection of oil assets is bought.

The Stock market will of course move down all this time (fluctuating as well, of course) , ( as it has started from February 18th)  till middle May-middle June, with a small return before final realization in July  that the USA and most of Europe is heading for second  recession due to Oil prices and fiscal restraint, as easing to make oil more expensive and spend extra printed money on it makes no sense, as it does not contribute to growth:

I published the graphs on February 6th, so there is some predictive power in them already. They correctly predicted stock downturn on February 18th.

ivars's picture

Spain's government-bond rating was cut one notch, to Aa2 from Aa1, at Moody's Investors Service, which placed a negative outlook on the new rating. In a Thursday statement, the credit-rating company said it expects the country's bank restructuring will cost more than the government currently expects, "leading to a further increase in the public-debt ratio." And Moody's remains concerned about whether the central government will be able to make the "required sustainable and structural improvement in general government finances, given the limits of central-government control over the regional governments' finances as well as the background of only moderate economic growth in the short-to-medium term." The rating cut concludes the review Moody's undertook on Dec. 15

uhb's picture

sell the f*ing dip in eurobonds, bitchez!

GFORCE's picture

The Eurozone financial situation is a sham. Greece again downgraded and unemployment still rising. This will happen in Ireland also.

The 'economists' there have lied through their teeth because they have no plan B. Faux stress tests and hope will not work this time I'm afraid because this is a date with destiny.

I expect parity in EUR/USD by 2012.