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.

Stratfor

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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The unseen but perhaps decisive grand alignment of the nations!

Summary:  Yesterday’s post The end of the post-WWII world is not the end of the world discussed the large-scale processes at work now.  Today we discuss the most astonishing — and seldom seen — aspect of these things.

The problems of the many individual nations in crisis have received ample attention from experts.  The two global dimensions of the crisis have not.  First, the global financial regime no longer works well (as seen, for example, in the faltering ability of the US to act as the reserve currency, the disinterest of other nations in replacing the US in that role, and the wild gyrations of currency values).  Second, the large number of nations experiencing large-scale structural change.  Here we look at the second — and least well seen — aspect.

Contents

  1. The grand alignment of the nations
  2. Cause of the grand alignment
  3. A tour of the nations
  4. For more information

(1)  The grand alignment of the nations

What caused the disaster of the Titanic?  There was no single cause, it resulted from a constellation of simultaneous events.  Bad weather. Bad luck. Mistakes. Lost gear. Errors of judgement.

Similarly today we have the major nations of the world simultaneously at or near (1 or 2 years?) major inflection points: Eurozone, UK, Japan, USA, and China.  In each case largely due to internal dynamics, as their current internal economic systems fail and require major reforms.   It’s the geopolitical version of the planetary grand alignment (which allowed NASA to send the Voyager One and Two probes to tour the solar system).

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