The European Central Bank is conducting "Stress" tests on about 65% of European Banks. The tests are similar to those conducted last year in the US. The point of the test is supposedly to find any danger arising from Banks inability to cope with further economic crisis. A series of scenarios are considered to see how each Bank would cope with the possibility that loans it has made etc. might default. They look at the assets the Banks have on their books, and their liabilities. For example, they look at the mortgages they have approved, and the value of the property purchased by those mortgages.
According to a report on CNBC today, part of the test will assume that Banks have to take a 16-17% haircut on the loans they have made to Greece. That is an assumption that they will not get back that percentage of what they have lent. But, Greek Bonds are already trading at only around 75% of their par value now. Most market commentators believe that Greece will default at some point,and a figure of more like 50% is seen as a more realistic estimate of how much lenders might lose.
The haircut on Spanish debt is thought to be around 3%, which again seems very modest given that private indebtedness in Spain is huge, and a vast amount of debt of the Cajas is tied up in Spanish Property, which has fallen in value, but is still vastly inflated in price, given the appalling condition of the Spanish economy with 20% unemployment, the construction industry in collapse, and the recent austerity measures of the Government certain to send economic activity even lower, and to lead to a period of significant deflation.
That such unrealistically lax terms have been set for the stress tests shows both how concerned the authorities must be about the possibility of large scale bank failures in Europe, and the real purpose of the tests - to stick a plaster over market concerns of such a collapse, to prop up financial markets. That is not likely to work. Whatever we might think about the financial institutions that caused the meltdown of 2008, market participants in financial markets are quite sophisticated. They know these conditions are unrealistic, and will not be persuaded by such test results. Stock markets and the Euro have rallied in the last two days for one simple reason, EU President Rompuy, announced that even if any of these banks did fail, the EU stands ready to recapitalise them with an EU version of the TARP that was introduced in the US for that purpose.
That really begs a simple question. If sovereign debt defaults might cause bank collapses across Europe, which then lead to the EU bailing out those banks, which could realistically only be done by cranking up the printing presses, and dishing out crisp new Euro notes to these banks, why not avoid that problem now. Why not instead of risking such default, risking sending Europe into a serious recession, due to co-ordinated "Austerity" programmes, simply print that money now, and pay off those sovereign debts. If Capitalist States run up debts, including debts due to bailing out Banks and financial institutions, then it appears that the workers of those countries have to pay the price through cuts in Public Spending,and attacks on their jobs, pay and conditions. If Banks, however, run up such debts, its not the shareholders in those banks who have to suffer. The banks it appears have to be bailed out!
In many ways Europe suffers a similar problem to the US. Although, it has some world class large banks - though we don't know how much some of these might be at risk through lending to sovereign states, as well as lending to other smaller banks - it has a multitude of smaller, regional banks such as the Landesbanks in Germany and the Cajas in Spain. These banks, lend often for property purchase and speculation, and to local businesses. In the US, every time there is a financial crisis there has to be a rationalisation of its smaller banks. It is certain that a similar rationalisation of these smaller banks has to take place in Europe. The Spanish Government has already encouraged mergers between some of its Cajas.
If some of these banks go belly up, which seems most probable, it will have a serious effect on their local economies, which could cascade upwards. The actions of right-wing Governments, such as the Liberal-Tories seems almost impossible to fathom under current conditions. It seems deliberately designed to cause an unnecessary recession. But, under current conditions, that could spiral out of control. As Roubini and others have said the actions of states in 2008/9 prevented the crisis deepening. It has led to a recovery of Western economies - Asian economies never went into recession, but have seen increased growth as renewed growth in the West has stimulated world growth. Provided the stimulus was not withdrawn, that recovery looked set to continue and gather pace - double dip recessions almost never happen. But, withdrawing the stimulus under current conditions could cause that. What is worse, if the recovery falters, and a new recession begins, it is not possible to simply reverse course again. If you are riding a bike, it takes effort to get it up to a certain speed, but having achieved it, momentum takes over some of the work. Stop pedalling, and allow the bike to slow down, and you have to put much more effort in to get the speed back, than if you had simply kept pedalling.
Having used up vast resources to stop the crisis in 2008/9 states now have not muc left. A crisis now would not be stopped so easily. Of course, there is a certain amount of truth to what the Tories and others say. The huge deficits were not sustainable forever, and as I have said several times here, the underlying reality is that living standards in the West have to fall relative to living standards in the East, where the locus of economic activity now resides. A rebalancing of both those related things - the deficits essentially exist because the West has borrowed from the East to enable it to continue its living standards, its consumption of goods produced in the East, rather than reduce its living standards, or produce goods of higher value that it could sell to the East in return - is inevitable. But, inevitable does not mean inevitable immediately! A period of higher inflation, as the price of sustaining economic growth, would have been well justified. It would have inflated away much of the debt, and would have provided a breathing space for the growth of the world economy - which is supported by the Long Wave Boom - to take some of the strain. It would have given time for Capital to be reallocated in the West to higher value production to sustain economic activity and living standards.
There are increasing signs that the permanent state is already trying to undermine the attempts of the Liberal-Tories to implement cuts in Britain - the call for 40% cuts from the Liberal-Tories are them kicking back at that attempt. Over the last couple of weeks there have been statements from both the military and the police about the dire consequences of cuts, similar statements have come from senior doctors even though the NHS is supposedly ring-fenced. The huge cock-up, over the new school building programme cutbacks, that undermines Gove, could also be the product of manoeuvring within the Department. Full-time bureaucrats have endless opportunities to make Ministers look stupid if they wish. But, there remain some measures that Governments can still take that are not so easy for the bureaucracy to frustrate. The VAT increase is one obvious exxample. If the Liberal-Tories are particularly stupid, particularly determined, there may be sufficient damage they can do to the economy that the State cannot prevent. Given that other right-wing governments in Europe are competing against each other to see which can appear the most macho, the combined effect could be to cause a significant economic contraction. Under those conditions, the US might respond by trying to protect its own economy against European economic illiteracy.
In one way or another over the next 10-15 years, the East will grow rapidly, and its economic weight will rise sharply as against that of the West. Living standards there will rise, whilst in the West they will relatively decline or remain stagnant, and the wage strikes in China are a symbol of that change. The decision to float the RMB is a further indication of that change in economic power. The Long Wave boom means that even if Europe goes into a serious recession, the East will continue to grow, it will build wider, deeper economic links with developing Africa and with Latin America as an alternative, by-passing Europe. Europe, and to an extent the US, can decide to grow through that readjustment by the painful or the less painful route. Europe could go through a Depression - indeed I expect in those countries like Britain and Spain where property occupies a significant role, that there will be a large (50% plus) deflation of property prices, even at the same time as a period of stagflation - lasting up to the 40 months duration of the 1930's Depression. It will bring about that rebalancing more quickly, more painfully than it need be, but at the end of that period, Europe would indeed emerge into the remaining 10 years or so of the boom, in a much leaner, fitter condition to compete on the world market.
As always the question remains will the working class allow Capital to achieve that goal at its expense?
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