Stratfor: can Europe’s banks break free from their doom loop?

Summary: Banks are the financial heart of modern nations, and Europe’s are in trouble. One of its greatest, Deutsche Bank, has severe problems. Here Stratfor looks at the perilous state of Europe’s banks, looked in a doom loop by their holdings of government bonds.


Can the Eurozone Break Its ‘Doom Loop’?

Stratfor, 16 February 2017.

In 2012, Europe’s sovereign debt crisis exposed the “doom loop.” Created by European banks’ tendencies to hold their home government’s debt, the vicious cycle, in theory, starts when markets lose faith in a government’s ability to pay back its debt, precipitating a sell-off of its bonds. The resulting drop in bond prices would then hit the balance sheets of the banks that still hold those bonds, making them more likely to need a bailout from their governments. This, in turn, could further erode investor confidence, leading to additional sell-offs that damage the banks even more. Despite the danger that banks’ practices pose, eurozone regulators have yet to find a way to sever the loop.

In the years since a doom loop nearly led to the eurozone’s collapse, authorities have tried (but failed) to break the bond connection between banks and their governments. A German proposal to limit the amount of their own government’s debt that banks can hold has been hotly contested by Italy and Spain, since implementing it would cause massive disruptions to their economies. Another German-led measure involved the creation of “bail-in” rules, which were adopted at the start of 2016. They required that a troubled bank’s private debtholders absorb its losses first, essentially losing their investment, before government money could be used to bail it out.

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Stratfor: Europe takes another step towards a cashless society

Summary: Stratfor describes Europe next step towards a cashless society, and why they are making it. This is one of the largest increases in government power since the invention of fiat currencies and the income tax. Watch this process, perhaps coming soon to America. {1st of 2 posts today.}


A World Without Cash

Stratfor, 29 February 2016


  • The European Union will likely soon decommission the 500-euro note in an effort to deter criminal activity.
  • The elimination of the euro’s highest denomination is the latest step in a longer-term move toward a cashless society, prompted by factors such as the growing use of negative interest rates and capital controls worldwide.
  • Setbacks in the transition to exclusively electronic transactions — for instance, a general loss of faith in financial institutions — may slow the trend but will not reverse it.


The eurozone has found a new scapegoat for international crime: the 500-euro note. The Continent’s leaders are seriously discussing decommissioning the euro’s highest denomination, which is favored by crime groups for transferring massive sums across international borders. Eliminating the bank note could help temper criminal activity, but in reality the implications are much broader. The idea is just the most recent step in an ongoing process moving Europe, and indeed the world, closer to an entirely cashless economy.

European authorities have long known that high-denomination bills are a boon for the criminal underworld, but the publication in February of a paper by Peter Sands, a Harvard academic and former CEO of Standard Chartered, accelerated the campaign to phase out the 500-euro note. The widely read paper, “Making it Harder for the Bad Guys: The Case for Eliminating High Denomination Notes“, is an exhortation to world leaders to eliminate their high-denomination notes because they make it easier for criminals to move money internationally. Sands specifically names the 500-euro note as the first that should go because of its high usage in criminal networks, but he foresees the same fate for the 1,000-Swiss franc, 10,000-yen notes and the $100 bill.

Sands is hardly the first to make the connection between high-value banknotes and criminal activity. Britain’s Serious Organised Crime Agency banned the 500-euro note in 2010 because of its regular use by criminals. The note had originally been introduced with the euro at the behest of Germany and Austria, which were accustomed to having higher-denomination notes in their own currencies. Its association with criminal activity also brought it to the attention of European authorities following the terrorist attacks in Paris in November 2015 and the ensuing renewed attempts to disrupt the Islamic State’s activities. The European Commission promised that it would work with the European Central Bank to examine the note’s role in terrorism financing, and the European bank has itself now launched an investigation with the ultimate goal, it appears, of phasing the note out.

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What can we learn from Greece’s crisis?

Summary: Now the final act has probably begun in the long divorce of Greece from the European Monetary Union. Ignore the predictions. They’re just wild guesses. Rather let’s take this moment to contemplate how Greece — and Europe — got here.  {1st of 2 posts today.}

“Europe will be forged in crises, and will be the sum of the solutions adopted for those crises.”
— Jean Monnet in his Memoirs (1978). He was one of the architects of the program to unite Europe (see his Wikipedia bio).

EU flag burning on the ground
Unnecessary death of a dream.

After years of confident assurances that all would probably work out for the best, Greece has gone off a cliff. This was long expected by readers of the FM website. In July 2007 they read that the European Monetary Union probably couldn’t survive the next recession in its current form. The cracks opened in 2010; in February 2012 I predicted it would not survive the crisis.

Europe’s lending and monetary stimulus programs to the PIIGS (Portugal, Ireland, Italy, Greece, and Spain) delayed the crack-up until 2010 and extended the slow decline since then, Now the crisis has begun. It will almost certainly bring big changes to Greece. As for the rest of Europe, and to the unification program, who can say? Greece is small, but it might create large precedents for others to follow.

While journalists report the exciting events to come — entertainment for America’s outer party (managers and professionals), because what difference does it make? — we can ponder how this happened and what America can learn from this.

We’ll see many economists explain why this resulted from incompetent politicians. This crisis would have been manageable if tenured economists at majored universities ran the world! Barry Eichengreen (Berkeley) says “Path to Grexit tragedy paved by political incompetence.” I suspect that a tag-team of Solon, Pitt the Younger, and Washington would have found this crisis difficult to handle.

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About the Euro crisis: the experts are wrong; the German people are right.

The great and wise tell us that the European unification project — of which the Euro is now center state — is good.  And the foolish German people are short-sighted and foolish to oppose aid to Greece that’s necessary to preserve it.  They’re wrong.  The German people are right.

From Eurointelligence’s coverage of the crisis:

  • “The main criticism of Merkel is … that she allowed a xenophobic climate to build up in her own party.”
  • “The more worrying development is the resurgence of German nationalism and euroscepticism, a trend Merkel tried to exploit for her own political benefit.”
  • “Greek aid is unbelievably unpopular, with 86% opposed according to a poll published last Sunday. Come to think of it, there are not many issues in a democracy on which 86% of the people agree on.”

Jürgen Habermas (sociologist and philosopher) said (source):

Such a lack of solidarity would certainly scupper the whole project. Of course, Merkel’s statement was intended at the time for domestic consumption in the run-up to the important regional election in North Rhine-Westphalia. But there can be no better illustration of the new indifference of the new Federal Republic than her insensitivity to the disastrous impact of her words in the other member states. Merkel is a good example of the phenomenon that “gut politicians who were ready to take domestic political risks for Europe are a dying breed”.

In fact the system is rotten to the core and doomed to fail.  A common currency without a strong nation cannot function, for reasons well-understood at the beginning (see this post from July 2008).  Europe’s leaders gambled that they could build this structure from the top down.  But Europe remain separate nations where it counts, in their people’s minds and hearts.

What does this tell us about the crisis?

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The periphery of Europe – a flashpoint to the global economy

Introduction:  This is the fourth in a series of dashed off speculative opinions.  Normal procedure on the FM website for these topics would be 3 thousand word posts, supported by dozens of links.  I dont’ have the time to finish them, and too many of these outlines have accumulated in my drafts file.  Perhaps these will spark useful debate and research among this site’s readers. 

In this third year of recession of the worst recession since the 1930s, reserves are depleted around the world.  Cash reserves of households, businesses, and governments.  This increases our susceptibility to a shock.  A poor bio-metaphor to this is the poor health of the world’s peoples in 1918.   The global economy remains unstable, as it was in 1929.  Many links in the world’s economic machinery have broken.  Although the global economy might be in recovery, the stress remains great.  Another link might snap at any moment, increasing the stress on the remaining links — some of which might in turn also snap.  Since the data is conflicting (as usual during times of large change), we don’t know how close they (or us) are to the edge.  Central Bankers know this, which is why they keep the petal to the metal while talking about exit strategies.

 One of the most dangerous flashpoints is Europe’s periphery (the USA is another).  Iceland, Ireland, Portugal, Spain, Italy, Greece, Eastern Europe up to the Baltics.   The european economy is highly integrated, and collapse in even a peripheral nation might ripple though the region with unpleasant consequences.  So rescue efforts are under weigh by the EU and IMF.  But the people of one of more of the crippled nations will certainly reject the prescribed austerity measures.  Greece is first in line, and general strikes are already being planned.  Red emphasis added.

George Magnus, a senior economist at UBS, comments on these developments in “The Return of Political Economy”, 3 February 2010 — A terrifying analysis expressed in mild words.  Excerpt:

In the Euro Area, the politics are complex. Politically, the chances of some of the sovereign invalids being able to implement required fiscal restraints are small. In others, the changes of doing so over a protracted period without social unrest are questionable. However, politically, nothing short of the integrity of the Euro and the Euro Area are at stake. For this very reason, the issue will probably not come to had in the immediate future, or for some time, because all Euro Area countries have strong vested interests in foreign a path back to stability as quickly as possible, and all the more so since contagion has spread to Portugal and Spain. But what will this need?

Austerity packages never work in a vacuum. One of more of 4 crucial ingredients have to comprise the setting.  These are…

  • currency debasement,
  • a sharp fall in interest rates,
  • monetization of debt, and
  • a bail-out financing package.

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Can the European Monetary Union survive the next recession?

“Europe will be forged in crises, and will be the sum of the solutions adopted for those crises.”
— Jean Monnet in his Memoirs (1978). He was one of the architect of the program to unite Europe (see his Wikipedia bio)

Rule #1:  even big things die.  Geopolitical analysts too often assume the permanence of major nation’s political and economic structures.  History clearly shows that the trappings of power — impressive buildings, big budgets, somber officials — tell us nothing about the soundness of the structure.

Consider the Euro, and the larger structure of the European Economic and Monetary Union (EMU or Eurozone).  They look like successes.  Not so, as it is too soon to tell.  Social structures are subject to punctuated equilibrium.  EMU stability during global expansion since its creation in 1999 tells us little.  What matters is its stability during the next recession.  The foundation might be build on sand, structurally flawed.  Perhaps even doomed to likely failure.

Flaws in the structure of the EMU

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