Looks like I chose a very eventful week to be on vacation. It was great to soak up the sun and history in
Granada without cellphone and internet
coverage. Since I had strict instructions to not engage in financial disaster
tourism, I could only admire the beautifully constructed apartments in Malaga from a distance.
On getting back the only news which surprised was JP Morgan’s $2bn hole. Looks like Ms. Drew didn’t detect what the (fool)hardy boys were up to.
Europe, things are
rocketing towards their inevitable conclusion. Greek election results weren’t
that surprising and neither is Spain’s
there are only two alternatives, either radically reduce demand for austerity
and pump more money or prepare for exit. The first is unpalatable and
unacceptable to the northern creditors. It also suffers from moral hazard. Any
loosening on Greece
will ensure that other peripheral countries ease off reforms too. Vested
interests will oppose and block most structural reforms even as investors flock
to the mirage of a “growth” pact. The rescue of Bear Stearns only emboldened
people to buy Lehman senior debt.
And it made Lehman management think that the plug wouldn’t be pulled on them.
Therefore the second seems more likely and indeed talk is veering in that direction. This is going to be a guaranteed 100% disaster. And it will make Lehman’s demise a study of excellence in public policy execution. The first problem is that official creditors will take a bath on the €145bn lent so far in addition to the contingent liabilities through the Eurosystem. The second problem is that the market will then start the hunt for the next victim (
Portugal). There isn’t going to be
just one member exiting. The third problem is that international support for
more IMF loans to Europe will change from
hesitant to nonexistent. It will make the practice of attempting to impress gullible carry
traders by mentioning large numbers a historical curiosity.
Spain, Bankia, supposedly the super
senior tranche of 7 Cajas, was found not to be as highly rated as was thought
earlier. Even then, Spain
is still unable to grasp the extent of the problems which lie ahead. Not having
learnt anything from Ireland
it is set to go down with its banks. The €30bn to be set aside is laughable
given the €1trn exposure of Spanish banks to real estate and construction.
Let’s see what tomorrow brings.