Submitted by South Of Wall Street
Facts Don’t Equal The Conclusion in Europe
This analogy applies to European banks holding sovereign paper... and for that matter the countries themselves (ie Italy voting on whether Italy's debt should be purchased by the ECB/IMF/EFSF, etc). At this point, any 'plans' are only slightly more creative than card shuffling tricks from a clown at an 8 year old's birthday party.
The nuclear rub occurs when the credit insurance written against my newly written down loan triggers a default on that debt, and the counter party demands cash settlement. Bad news. There is no cabbage, because that new liability put a strain on existing cash as more capital was required to be in compliance with regulatory ratios. Here's the bitch. To raise cash, you have to tap the capital markets, which scares investors as they equate this with being under-capitalized and pull their existing funds (the bank's capital) from said institution. Markets then take control. Market participants (like me) subsequently pull bank from lending to that bank by refusing to buy newly issued debt and shorting the daylights out of their equities. All this just as the bank desperately needs to raise more capital. With no more suckers willing to pony up and no more equity value, you're either toast or the government is forced to fill the void (TARP, TLGP). During our melt down we had one MF who took the reigns and solved the issue: Hank Paulson. Europe doesn't have a "Hank", and thus nothing is going to be done.
The bottom line is that this is obviously overly simplistic (I'm not real bright), but at the end of the day you have to take a position: the under (don't figure it out....run out of time) or the over (figure it out...puppies and cupcakes) on whether or not the same politicians that haven't been able to figure this out over the last 2 years are going to be able to do so before the nuke goes off. I'm taking the under and it looks like the bond market agrees with me.
Simon Johnson (MIT economist and former chief economist for the IMF):
I wonder whether we'll say 2008 wasn't the real crisis — it was a warm-up, but the real crisis was the sovereign debt crisis in Europe.