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Is Europe A "Lehman-Like Symptom Of Faulty Globalized Finance"? Bank Of America Thinks So

Tyler Durden's picture




 

For months in a row, the core propaganda meme seeking to drag lambs into the ponzi, has been one of "ignore Europe - it is irrelevant." Naturally this "narrative" was primarily spread by expendable C-grade media elements whose careers will promptly terminate once this latest episode of artificial "decoupling" is over, as we have been warning for months (at a cost to the S&P of over 200 points). And judging by today's US Trade Balance, which came in at a whopping $47.8 billion on expectations of $45 billion, the widest gap since June, which was driven due a plunge in European exports as the European economy is shriveling in the grips of what is about to be a doozy of a recession, it may be time to polish those resumes as the inevitable decoupling approaches with every passing hour. Yet one of the best comments on what Europe really means for the world comes from none other than Bank of America. While we have discussed previously that BAC is doing its best to crush the market and to precipitate QE3, thus like everyone else, always having an agenda in its message, what it is saying is spot on. And it is as follows: "Europe matters, according to the most oft-heard arguments, because of its size and the euro’s reserve currency status. The Euro area’s systemic relevance (both in trade and financial terms) means that its governance crisis is a global menace. This narrative portrays Europe as a self-contained shock emitter, with the rest of the world cast as innocent bystander. Rather, much like the Lehman bust, the current Euro area crisis may be a symptom of faulty globalized finance. Europe is rightly being held to account for fiscal mismanagement, but there may be bigger cracks in the background." Spot on, and it gets even worse, which we urge everyone who still doesn't grasp the linkages between Europe and the US to read on.

From Bank of America:

Hot topic: Europe will remain a global issue

The European crisis remains center-stage but markets are no longer the proverbial deer in the headlights. With hints of normalization in capital flows to emerging markets, investors have become more discriminating. The latest currency moves summarize the prevailing sentiment: greater appetite for LatAm returns and a pass on EMEA assets (Chart 2). This pattern conveys both caution with exposure to the Euro area and optimism on the back of the recent improvement in the US macro data; thus we highlight LatAm’s good fortune, being relatively safe from European ripples and influenced by a more dynamic US.

But while not necessarily dismissing the risks in Europe, this pattern suggests markets may no longer view the fallout from the ongoing crisis as having global repercussions. Confidence in the potential for a US decoupling is rising. And a global shock that does not engulf US financial markets can hardly live up to its name. According to the IMF, the US accounts for about one-third of both global stock and bond market capitalization. But  in terms of turnover, the clout of US markets can reach two-thirds of the global total. So if the European hurricane is downgraded to a tropical  storm on US shores, it is also likely to be rated as a moderate nuisance in many parts of the world.

Arguing for less anxiety on the US exposure to Europe are better economic momentum and greater policymaking efforts to redistribute liquidity. The expansion of FX swap line agreements, the ECB’s offer of unlimited long-term refinancing, and the European Council announcement that EU and other countries would channel resources to the IMF have improved the actual and prospective liquidity situation in Europe. But are these factors enough to restrain the global reach of the European crisis?

The bigger picture

Europe matters, according to the most oft-heard arguments, because of its size and the euro’s reserve currency status. The Euro area’s systemic relevance (both in trade and financial terms) means that its governance crisis is a global menace. This narrative portrays Europe as a self-contained shock emitter, with the rest of the world cast as innocent bystander. Rather, much like the Lehman bust, the current Euro area crisis may be a symptom of faulty globalized finance. Europe is rightly being held to account for fiscal mismanagement, but there may be bigger cracks in the background.

A fundamental issue is the international allocation of liquidity. Liquidity crises are typically generated by solvency concerns. In a global context, however, this raises questions of international cost sharing. In practice, the IMF is the institution with the legitimacy to dilute the burden across its members and channel official liquidity to troubled parts of the system. But what works well when the Fund’s client is a smaller EM economy sputters when the troublemaker is a large advanced country. Who will pick up the tab? Berlin is not the only capital pondering this. As Obstfeld (2011) describes, “the problem of allocating fiscal burden ramifies into every facet of the debate over international liquidity”.

Still flying blind?

When markets turned on Italy during the summer, it not only marked the point of no return for European policymakers, it also laid bare the limits of the international financial system. Italy’s gross financing needs for the next three years reach €750bn, more than double the amount the IMF disposes of. As a result, the current crisis-fighting framework remains ill-suited to deal with persisting crises in Italy and Spain. The Fund is on course to receive almost €200bn in loans, but with the EFSF still out of its depth, the backstops are not ready to be activated. Are they about to be tested nonetheless?

Our Euro area team thinks it is unlikely Italy will request a full-fledged loan package from the IMF over the next few months. If it remains committed to reform, the Italian government will be able to count on the ECB and on precautionary lines from the IMF. But downside risks remain significant. Italy is not only exposed to its own program implementation risks but also to those of Greece. And we remain concerned about the outlook for the Euro area’s weakest link. Greek political risks have been mostly pushed back to 2Q, but the saga of the unyielding Greek austerity effort continues.

All this points to the need to keep reinforcing the safety net. Recent improvements in financial markets did not stop ECB President Draghi from claiming that swift deployment of backstops are “urgently needed”. And given the scale of the crisis, work on the containment tools is likely to require further involvement from reluctant outsiders.

 

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Fri, 01/13/2012 - 10:40 | 2061265 Oh regional Indian
Oh regional Indian's picture

Is Bank of America A "Lehman-Like Symptom Of Faulty Globalized Finance"? Everyone Thinks So...

ori

the-deep-perversion-of-language/

Fri, 01/13/2012 - 13:54 | 2062266 sgt_doom
sgt_doom's picture

On the other hand, just look at the SocGen deal with Rockefeller Financial Services (their purchase of 37% of it to enable greater penetration in the ultra-high-net-worth-individuals market).

Of course, please ignore the fact that Reuben Jeffery III, the number two guy (and number one finance guy) at the Coalition Provision Authority in Iraq during that oil securitization and missing $8.7 billion in Iraqi oil funds (Route: Ex-Im/Iraq Trade Bank >>> FRBNY [chair: Timothy Geithner] >>> managed by JPMorgan Chase [MD: Daniel Zelikow, best friend of Timothy Geithner]).

Also, please ignore the convenient "suicide" of James McDonald at Rockefeller Financial Services, which opened up the position for Trilateral Commission member, Reuben Jeffery III (18 years at Goldman Sachs, naturally), to assume that position.

Also please ignore the bizarre "suicide" of Philip Merrill, the chair of Ex-Im Bank during that period, whose death by shooting half of his head off with a shotgun aboard his yacht, then picking up an extremely heavy anchor, diving overboard and swimming 11 miles from the ship, where he would then weigh down his body with said anchor, was ruled a "suicide."

Yup, one can rest easy that the SocGen deal had nothing to do with washing those funds....

(Also, please ignore the fact that Timothy Geithner was a past member of David Rockefeller's Trilateral Commission, and that Geithner was reputed to be handpicked by his successor, Peter G. Peterson, protege of David Rockefeller, to follow him at the NY Fed.  After all, ignorance is bliss!)

Fri, 01/13/2012 - 14:45 | 2062512 Oh regional Indian
Oh regional Indian's picture

Good stuff sgt.

ori

Fri, 01/13/2012 - 10:42 | 2061271 Spooky Polish
Spooky Polish's picture

BOA Sucks :) 

Fri, 01/13/2012 - 10:43 | 2061279 Oh regional Indian
Oh regional Indian's picture

That coming from a pair of tits is just plain wrong and funny!

ori

Fri, 01/13/2012 - 10:41 | 2061273 fonzannoon
fonzannoon's picture

If the martket is down 40 points at the close and I have to hear about how resiliant the market is and what a great buying opportunity today presented itself as I am moving to the Maldives. They are slowly going under water but at least they admit it.

Fri, 01/13/2012 - 10:44 | 2061283 LongSoupLine
LongSoupLine's picture

 

...like the Lehman bust, the current Euro area crisis may be a symptom of faulty globalized finance. ...but there may be bigger cracks in the background.

BoA would know...

Fri, 01/13/2012 - 10:46 | 2061288 5880
5880's picture

The problem is lack of exchange traded, uniformed contracts, traded with a clearing house.

There is zero transparency who knows which trades are good under stress?

This must be what is what like trading stocks under the buttonwood tree

Fri, 01/13/2012 - 10:50 | 2061310 cowdiddly
cowdiddly's picture

I think the buttonwood tree method was more efficient compared to this market and vastly more transparent and honest.

Fri, 01/13/2012 - 13:30 | 2062171 Urban Redneck
Urban Redneck's picture

But our crack-head Führer got his thousand pages of FINANCIAL REFORM enacted into law and everything was supposed Unicorns & Skittles...

Fri, 01/13/2012 - 10:56 | 2061322 bb5
bb5's picture

Here is a tweet yesterday from Jim Rickards

 

Jim Rickards@JamesGRickards21h

All the news from Europe today is good. There's your reality check. OK, now back to the Kool-Aid fountain & sell EUR/USD!!

Fri, 01/13/2012 - 10:55 | 2061323 Flounder
Flounder's picture

By now all EURUSD traders are on a strict lithium diet.

Fri, 01/13/2012 - 10:57 | 2061330 Dr. Engali
Dr. Engali's picture

How does that saying go? If you live in glass houses don't go throwing research reports? Nice redirection BOA..

Fri, 01/13/2012 - 11:03 | 2061353 Jlmadyson
Jlmadyson's picture

You are 10X Lehman at this point BAC.

Fri, 01/13/2012 - 11:08 | 2061372 toadold
toadold's picture

Let's see; Everybody owes more than they've got, Everbody is not going to make enough money to pay the principal, Everybody dosen't make enough to keep up with even the interest payments....Is the technical banking term for this SPLAT?

Fri, 01/13/2012 - 11:42 | 2061548 KickIce
KickIce's picture

Pot - Kettle - Black

Fri, 01/13/2012 - 11:59 | 2061653 gianakt
gianakt's picture

The big suprise will be that England gets down graded as well. This will happen today after the bell close.

Fri, 01/13/2012 - 12:18 | 2061753 Judge Arrow
Judge Arrow's picture

Ah, those "reluctant outsiders" - now who would that be in this dog pile Ponzi of 'eager insiders' - sounds like the lovely I baited the other night with a Lincoln and she wanted a Ben, but after costing in the prolonged medicals I would endure afterward, after all my heartbeat has not been what it was after 22 years on the bench, I took a pass - both of us reluctant, one of us outside. But I digress, it would seem these nominative gerunds are in fact, the taxpayers. Yes, they are the reluctant outsiders. As a mindset, it tells us all we need to know about BAC, the Ponzi Party, etc. Keep drinking, boys. Round on me, what the hell, what I got in my pocket isn't worth....

Sat, 01/14/2012 - 12:02 | 2064536 sara29
sara29's picture

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