Greece is cutting their Goods and Service Tax (GST) to replace the Lost Economic Activity the High GST Caused

Posted by PITHOCRATES - August 3rd, 2013

Week in Review

There are few things more enjoyable than going out to a nice restaurant.  Where you and your significant other can enjoy a fine meal.  And some adult beverages.  A couple of cocktails each before dinner.  A couple of glasses of wine each with dinner.  Then dessert and coffee after dinner.  It doesn’t get better than this.  But it can get costly.  Especially when there is a 23% GST (see Greece slashes restaurant taxes by Alanna Petroff posted 8/2/2013 on CNNMoney).

This week, the Greek government slashed the restaurant sales tax on food and drink across the country, making it cheaper for everyone to go out and grab a meal.

The restaurant sales tax, which was 23%, has been cut down to 13%…

It’s expected that the break will cost the government €100 million in lost tax revenue in the short term, but will ultimately benefit the country in the long run as it boosts tourism spending and encourages restaurant owners to declare more of their revenue to the government.

They acknowledge that a high GST tax (goods and service tax) rate discourages people from going out.  But the notion that cutting a tax rate will cost the government is a foolish Keynesian notion that must be done away with.  For example, let’s look at the numbers for the above noted dinner out.  If each entree is €8, each cocktail/glass of wine is €5, each dessert is €5 and each coffee is €2 the total for a dinner out is €70.  Add in the 23% GST (€16.10) brings the total up to €86.10.  That’s a lot of money.  So let’s say we can only do this twice a week.

The best part of going out is relaxing over adult beverages.  Which is often the largest part of the bill.  In our example, we drink a total of 16 adult beverages in those two dinner outs (and walk home/back to the hotel or take a taxi as we shouldn’t drive anywhere after enjoying 4 adult beverages during a meal).  Our total GST comes to €32.20.  Equivalent to the cost of 6.4 adult beverages.  In other words, the GST makes us pay for 6.4 adult beverages that we’re not allowed to drink.  So our 2 nights out we pay for 22.4 adult beverages but can only drink 16 of them.  If we went out 4 nights a week we’d pay for 44.9 adult beverages but could only drink 32 of them.  Or drink about 71.3% of what we paid for.  Which would limit our evenings out.  Now let’s look at what happens when the GST is only 13%.

The GST for our 2 nights out only costs us 3.6 adult beverages.  Not 6.4.  Which isn’t too bad.  So we are more willing to eat out.  If we go out 4 nights a week that GST now only costs us 7.3 adult beverages.  In other words, we pay for 39.3 adult beverages while getting to drink 32 of them.  Or about 82%.  Which would encourage us to go out more than before.

So with the high GST rate we may go out only twice a week and pay €32.2 in GST taxes.  But at the lower GST rate we may go out 4 times a week and pay €36.40 in GST taxes.  A 4.2% increase.  And because the lower tax rate is getting people to go out the restaurant owner doesn’t have to cheat the government out of the tax to get people into the restaurant.  If the tax rate is reasonable people will pay it and the owner will pass it on to the government.

This is something Keynesians don’t understand.  They see only loss tax revenue with a cut in tax rates.  Not the additional economic activity those lower tax rates will generate.  Which is why Keynesians have horrible economic records.  Like President Obama.  And the Eurozone nations.  While people who understand classical economics have good economic records.  Like Ronald Reagan.  And Margaret Thatcher.

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The Cyprus Bailout includes the Confiscation of People’s Personal Savings

Posted by PITHOCRATES - March 17th, 2013

Week in Review

President Obama isn’t worried about the deficit.  Or the debt.  Neither are Democrats.  Who see no problem with increasing federal spending even more.  Probably because there are Nobel Prize winning economists like Paul Krugman saying deficit spending is a good thing. Because what can possible go wrong with spending money you don’t have?  No doubt the very same things they were saying in Greece.  Italy.  And Cyprus (see Analysis: Cyprus bank levy risks dangerous euro zone precedent by Mike Peacock posted 3/17/2013 on Reuters).

A hit imposed on Cypriot bank depositors by the euro zone has shocked and alarmed politicians and bankers who fear the currency bloc has set a precedent that will unnerve investors and citizens alike.

After all-night Friday talks, euro finance ministers agreed a 10 billion euro ($13 billion) bailout for the stricken Mediterranean island and said since so much of its debt was rooted in its banks, that sector would have to bear a large part of the burden.

In a radical departure from previous aid packages – and one that gave rise to incredulity and anger across Cyprus – the ministers are forcing the nation’s savers to pay up to 10 percent of their deposits to raise almost 6 billion euros…

The decision sent Cypriots scurrying to the cash points, most of which were emptied within hours. Most have been unable to access their bank accounts since Saturday morning, a move unlikely to engender calm…

A Cypriot bank holiday on Monday will limit any immediate reaction. The deposit levy – set at 9.9 percent on bank deposits exceeding 100,000 euros and 6.7 percent on anything below that – will be imposed on Tuesday, if voted through in parliament…

“I understand that electorates in Germany and northern Europe demand some sacrifice. However, when you accept a solution that basically expropriates 10 percent of deposits, you set a dangerous precedent,” Vladimir Dlouhy, former Czech economy minister and now international advisor for Goldman Sachs told Reuters in Berlin. “If we get into deeper trouble, God help us, they may try to take 50 percent.”

Ouch.  That’s what can go wrong with too much government spending.  And too much debt.  The government will just seize your money.  Scary.  Hearing stuff like this makes you pay a little more attention to that idea someone floated about the government expropriating 401(k) retirement accounts.  Taking our retirement money.  But being magnanimous enough about it to give us something valuable in return.  A promise to pay us a fixed retirement benefit.  Something as reliable and solvent as Social Security.  Preferably like it used to be.  Before they began forecasting it was going bankrupt.

So this is the downside to spending money you don’t have.  Bank runs.  As people pull their money out of our banks before the government can seize it.  Causing banks to fail.  Crashing the economy into a depression.  Just like all those bank failures in the Thirties caused the Great Depression.  But other than this there is little to worry about spending money you don’t have.

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France is Raising Taxes on Wealthy Individuals and Businesses to Stimulate Economic Activity

Posted by PITHOCRATES - September 30th, 2012

Week in Review

When a store wants to increase sales what do they do?  Raise prices?  Or lower prices?  Well, based on those sales papers, one has to say they lower prices to increase sales.  Because if someone stops buying from a store raising prices just isn’t going to bring them back to that store.  For how many people ever say they would shop more at a store if only they would raise their prices?  Zero people.  For no one ever shops where their money will buy less.

The higher the price of something the less we buy.  Something few people will dispute.  Unless, of course, it’s rich people investing in job-creating businesses.  As government people believe that rich investors will spend more money the less they can make from their investments.  Especially in France (see Hollande opts to punish French rich with €20bn of new taxes by John Lichfield posted 9/29/2012 on The Independent).

France’s Socialist government insisted yesterday that it could solve the conundrum of simultaneous deficit-cutting and growth which has eluded every other European country from Greece to Britain.

As new clouds gathered over the eurozone, President François Hollande pushed ahead with the country’s toughest budget for three decades, taking €20bn (£16bn) of new taxes from big businesses and the wealthy but imposing relatively moderate €10bn cuts on state spending.

With growth stagnant and unemployment rising sharply, the success or failure of the 2013 budget could decide whether Europe’s second-largest economy becomes part of solution to the eurozone crisis or a new, and devastating, part of the problem.

If we can learn anything from history it’s this.  Tax cuts stimulate economic activity.  Tax hikes don’t.  So growth will remain stagnant in France.  And unemployment will rise even further.  Especially when they will tax very successful business people at 75% on earnings and eliminate business tax breaks.

Among other things, the budget introduces Mr Hollande’s “temporary” 75 per cent tax on personal earnings over €1m and abolishes the tax breaks on large firms introduced by his predecessor, Nicolas Sarkozy.

The Prime Minister, Jean-Marc Ayrault, spoke of a “fighting budget” which would help to get France “back on track” after 38 years of successive state deficits. He insisted the target of 0.8 per cent growth next year was realistic and would be achieved.

But opposition politicians said the budget had been “muddled together”, and was more concerned with preserving Mr Hollande’s campaign promises than addressing France’s – and Europe’s – deepening economic crisis. They pointed out that, while almost all European countries were cutting back spending, the French budget for 2013 preserved the 56 per cent of GDP spent by the state and marginally increased the number of state employees, by 6,000…

Critics complained, however, that the budget did nothing to tackle the erosion of France’s international competitiveness, which has been blamed for large-scale redundancies in the car industry and other sectors. The cost of employing a worker in France has increase by 28 per cent in the past decade, compared with an 8 per cent increase in Germany.

A growth rate of 0.8%?  They’ll be able to achieve what many call a recessionary level of growth?  Not much of a goal.  No wonder France has one of the most uncompetitive workforces.  That massive welfare state costs money.  And there’s only one way to get the money to pay for that massive welfare state.  Taxes.  Even if a government runs a deficit they finance with borrowing.  Because they have to pay the interest on that debt with taxes.

Everything comes back to jobs.  The more jobs there are the more tax revenue the government can collect.  But to create more jobs businesses have to grow larger.  But when governments tax businesses (and business investors) so excessively there is little incentive to grow these businesses larger.  So France’s actions are not likely to have any of the intended results.  In fact they will probably only make a bad situation worse.  And may make them part of the problem in the Eurozone crisis.

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Some say the Germans should Remember that Austerity gave them Hitler and should therefore Forgive some Greek Debt

Posted by PITHOCRATES - February 19th, 2012

Week in Review

There are more Nazi comparisons in the continuing saga of the Greek debt crisis as people keep picking on Germany.  The strongest Eurozone state.  And the only one who can bail out the weaker ones (see Germany has forgotten the lessons of war reparations by Jeremy Warner posted 2/17/2012 on The Telegraph).

While on the subject of historical parallels, there’s another which has not yet been given sufficient an airing. This was the vexing question of German war reparations after the slaughter of the First World War, brilliantly identified by John Maynard Keynes at the time in his polemic, “Economic Consequences of the Peace”, as fundamentally unfair on the Germans. Keynes branded the Treaty of Versailles a “Carthaginian Peace”.

True.  The Treaty of Versailles did treat the Germans unfairly.  A word commonly bandied about at the time in Germany was humiliated.  And betrayed.  Even stabbed in the back.  Because the Germans didn’t start that war.  Everyone was eager to go to war.  And nearly everyone did thanks to those entangling alliances that George Washington warned us about.  And another thing.  The Germans didn’t lose the war.  No one did.  And no one won the war.  It ended in an armistice.  Much like the Korean War.  And yet during the treaty process they identified Germany as the sole culprit that caused the war.  And the allies all tried to recoup their losses and rebuild their empires by bleeding Germany dry.

Part of Germany’s purpose during interminable attempts to renegotiate these debts on less oppressive terms was to demonstrate that the German economy was in no position to pay – ergo, the creditor was at some stage going to have to take an almighty hit. Indeed, it is sometimes argued that the Weimar hyperinflation was deliberately engineered in order to demonstrate this fact beyond doubt. There can be no other explanation for the bizarrely ruinous policies of deficit financing pursued by the Bundesbank at that time. No sane central banker could possibly have sanctioned such a strategy…

Given its history, it is quite strange that Germany has such difficulty in grasping this reality. It is sometimes said that German attitudes to the economy and the current crisis are instructed by experience of Weimar inflation and its catastrophic consequences. Yet it wasn’t hyperinflation that brought Hitler to power, but rather the depression of the early 1930s, which in Germany’s case was greatly exaggerated by the pro-cyclical austerity the government of the time insisted on applying to the problem. Those who who [sic] don’t learn from the past are doomed to repeat it.

The Weimar hyperinflation played a part.  But what really motivated Hitler was the Versailles Treaty.  Hitler was a veteran of WWI.  He served bravely.  Was promoted to corporal.  Suffered temporary blindness from a gas attack.  And he knew the Germans weren’t beaten.  Exhausted?  Yes.  War weary?  Yes.  But militarily defeated?  No.  It was the humiliation of the Versailles Treaty that drove Hitler.  So much so that when his panzer armies conquered France he met the French in a special rail car to sign the instrument of surrender.  The same rail car the Germans signed the humiliating Versailles Treaty.

Many Germans rallied around Hitler because they felt the same way.  Germany had grown to be the dominating European power.  And that treaty did what Germany’s enemies couldn’t do.   Change the balance of power in Europe.  To reverse the German successes of the last century or so.  This is what brought Hitler to power.  Vengeance.  To right the wrongs done to Germany.  Had they not been so wronged it is unlikely that a gifted orator would have risen to inflame the masses.  For there may have been no hyperinflation without those punishing reparations in the first place.  And without that economic crisis the world wouldn’t even know the name Adolf Hitler.  (Probably.  Unless a prosperous Weimar Germany liked and bought his art.  Then instead of remembering him as a crazed mass murderer we would remember him as an artist.)

In contrast nobody wronged Greece.  They got into this mess on their own.  By irresponsible government spending.  And the cure for irresponsible spending is responsible spending.  Not forgiving debt so they can keep spending irresponsibly.  German hyperinflation resulted from unjust war reparations that destroyed the German economy.  The Greek crisis resulted from irresponsible spending that destroyed the Greek economy.  Spending is the problem.  It needs to be cut.  So they stop running deficits.  And stop growing their debt.  But cutting government spending is easier said than done.  For once the government makes the people dependent on government benefits the people tend to not want to give them up.  But they must.  It’s the only way to fix the underlying problem.  Irresponsible spending.  And forgiving debt not only misses this central point.  It encourages more of the same.

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Moody’s follows Fitch and Standard & Poor’s and downgrades Eurozone Countries

Posted by PITHOCRATES - February 18th, 2012

Week in Review

Now it’s Moody’s turn to show their lack of confidence in the Eurozone (see Moody’s downgrades European countries by James O’Toole posted 2/14/2012 on CNNMoney).

Moody’s cut the credit ratings of six European countries on Monday amid continued anxiety over the continent’s debt crisis and its sluggish economy.

Italy, Malta, Portugal, Slovakia, Slovenia and Spain were all downgraded, while three other countries — Austria, France and the United Kingdom — had the outlook on their current Aaa ratings changed to “negative…”

The move follows similar downgrades of European nations recently by fellow rating agencies Fitch and Standard & Poor’s, and comes as investors are waiting to see whether euro-area finance ministers will approve the latest bailout for Greece this week…

Investors may be heartened by the fact that Moody’s didn’t downgrade the eurozone’s bailout fund, the European Financial Stability Fund.

Interesting.  They didn’t downgrade the European Financial Stability Fund.  But they downgraded the countries that fund it did.  Interesting because the member states guarantee the loans.  The interest costs.  And the capital raising costs of this Eurozone bailout fund.  So if the member states are greater risks one would think the thing they fund and guarantee would be a greater risk, too.

Looks like those social democracies of Europe are learning their lessons about socialism.  It’s costly.  And it bankrupts nations.  Capitalism doesn’t do this.  Only those nations that abandoned capitalism in favor of social democracy find themselves in these financial messes.  Sadly, two of the great nations of capitalism are limping down this same road.  The UK.  And the USA.  Who had their credit rating downgraded themselves only last year.  And the latest budget offered by the Obama administration forecasts a $1.3 trillion deficit.

Those who do not learn the lessons of history are condemned to repeat history’s worst mistakes.  And, apparently, we are.

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The Bank of England to Dabble in Quantitative Easing even though it Failed when the Americans Tried It

Posted by PITHOCRATES - February 12th, 2012

Week in Review

It appears that the Americans aren’t the only Keynesians to never say die when it comes to Keynesian policies.  Even though the American’s quantitative easing proved to be a failure it’s not stopping the British from trying (see Bank Of England Due To Announce More QE posted 2/9/2012 on Sky News).

The Bank of England is expected to unleash another multi-billion round of emergency support for the UK economy today…

Analysts believe it will extend its quantitative easing (QE) programme by another £50bn, taking the total to £325bn, in a bid to stave off a double-dip recession…

But further QE could spell bad news for pensioners.

It can fuel inflation, which would mean more gloom for retirees who have already seen the value of their pension pots eroded by the high cost of living and low interest rates…

“The game changer, however, is the euro. If the eurozone cannot come up with a solution to the debt crisis, the impact on the UK will be significant.”

People with debt love inflation.  People with savings hate it.  Anyone who owes money will find it easier to repay that money back when money depreciates and is worth less.  It’s like getting a discount.  If your money is worth 30% less when you repay your debt you save 30% in purchasing power.  The lender, though, loses 30% in purchasing power.  That’s why banks hate inflation.  And why people who borrow from banks love it.  And where do banks get the money to loan?  From a lot of pensioners.  Who have saved for their retirement.  Only to see the purchasing power of their retirement nest egg reduced during periods of inflation.

This is the dark side of inflation.  It’s like another tax.  A high tax.  And one no one can escape.  Especially those living on fixed incomes.  Because as prices rise their fixed incomes buy less.  But governments still like causing inflation.  Because if any of those pensioners bought any government bonds, it will be a lot easier to redeem those government bonds when they’re worth less.  Making it easier to tax, borrow and spend.  By making those least able to afford it pay for their spendthrift ways.

Worse, this quantitative easing (QE) will all be for naught if the Eurozone debt crisis doesn’t quickly go away without anymore bailouts.  Which means this QE will be for naught.  Because the countries in the Eurozone taxed, borrowed and spent their way into this mess in the first place.  And as can be seen governments are hard-pressed to give up their spendthrift ways.

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Fitch follows S&P and Downgrades Eurozone Countries which doesn’t Help the Eurozone Debt Crisis

Posted by PITHOCRATES - January 29th, 2012

Week in Review

First Standard & Poor’s.  Now Fitch.  Things are not looking up for the Eurozone (see Greek debt deal hit by eurozone ratings downgrades by Angela Monaghan posted 1/28/2012 on The Telegraph).

Following similar action from rival Standard & Poor’s (S&P) earlier this month, Fitch downgraded Italy, Spain and Slovenia by two notches and Belgium and Cyprus by one notch. Fitch took no action on France’s AAA credit rating despite S&P downgrading the country two weeks ago.

The rating agency warned that the eurozone crisis would only be resolved “as and when there is broad economic recovery” and with “greater fiscal integration”.

It was also being reported last night that the German government wants Greece to hand over control of tax and spending decisions to a ‘budget commissioner’ appointed by the rest of the eurozone, before the country gets its second bail-out.

The budget commissioner would have to power to veto decisions made by the Greek government, according to a proposal seen by the Financial Times, marking a significant step-up in the EU’s powers over the sovereign governments of member states…

Eurozone finance ministers said that while there were still considerable challenges ahead, they believed in the future of a united eurozone.

They’re still trying to save the Eurozone because they can’t save the Eurozone.  Greater fiscal integration?  Hand over tax and spending decisions?  Having a veto over other sovereign nations?  It sounds like to save the Eurozone will require some erasing.  Of the borders between these sovereign states.  Something that sovereign states don’t like.  Being conquered.  Only with Euros and debt.  Instead of artillery and bullets.  Or sword and lance.

So to save Greece all the Greek people have to agree to is to become a vassal of the greater power.  Sort of a step back in time.  To the days of feudalism.  Where the poorer states serve their lord.  Who serves their sovereign.  The new Eurozone structure.  Whatever that may be.  Where the stronger member states will be among the nobility and have greater privileges than the poorer states.  Who will be among the serfs.  Grateful for the generosity of their masters.  And showing due gratitude and obedience.

It’s a simple plan.  But knowing the history of Europe one that is not likely to work.  Not in an age when the trend is towards independence.  Not subjugation.  Hell, even Scotland is talking about their independence from the United Kingdom.  So to think the Greeks are just going to surrender their sovereignty is wishful thinking.  Not in the land where Western Civilization was born.  Not in the country that contains the once great city-state of Athens.  That inspired Alexander the Great.  And the Romans.  No.  That’s just a wee bit too much history for the Greeks to surrender.

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Standard & Poor lowers the Credit Rating for Nine European Countries

Posted by PITHOCRATES - January 15th, 2012

Week in Review

Interest rates are subject to the laws of supply and demand.  The more questionable a borrower looks to be able to repay the loan the higher the interest rate.  Because there is a low supply of people willing to loan to such risky borrowers.  So they have to offer higher rates to get people to take a greater risk.

When S&P took away America’s AAA rating this did not happen, though.  Not because America was immune to the laws of supply and demand in the bond market.  But because Europe had even bigger problems.  And they just got worse (see S&P cuts credit ratings for France, Italy, Spain by JAMEY KEATEN posted 1/14/2012 on Yahoo! News).

Standard & Poor’s swept the debt-ridden European continent with punishing credit downgrades Friday, stripping France of its coveted AAA status and dropping Italy even lower. Germany retained its top-notch rating, but Portugal’s debt was consigned to junk.

In all, S&P, which took away the United States’ AAA rating last summer, lowered the ratings of nine countries, complicating Europe’s efforts to find a way out of a debt crisis that still threatens to cause worldwide economic harm.

Austria also lost its AAA status, Italy and Spain fell by two notches, and S&P also cut ratings on Malta, Cyprus, Slovakia and Slovenia.

Some are arguing that this won’t impact the Eurozone bailout.  Because of the austerity measures the troubled countries have taken.  But it doesn’t help.  It just pushes the final resolution of the Eurozone debt crisis further out.  And probably makes it more unpleasant.

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The Eurozone Debt Crisis is Starving Small Business of Cash

Posted by PITHOCRATES - January 8th, 2012

Week in Review

As nations borrow themselves into financial crises small businesses suffer (see As chances for bank loans shrink, Britain’s small firms struggle by Henry Chu posted 1/1/2012 on The Los AngelesTimes).

Last month, the European Central Bank surprised many economists with its announcement that it would be doling out a record amount of money in special low-interest three-year loans to the region’s struggling financial institutions. More than 500 banks signed up to borrow a staggering $640 billion, evidence that many are having trouble drumming up cash.

The hope is that they’ll hand out some of their new funds from the ECB as commercial loans and buy up bonds of financially troubled nations such as Italy and Spain. But economists say it’s also likely that many banks will hoard the extra money to beef up their reserves in the event of an emergency.

That would be bad news for business owners whose own reserves are running low and who need the banks to help tide them over, for example, shopkeepers who traditionally require a boost through lean winter months…

The funding freeze is largely caused by the reluctance to lend on the part of Britain’s mainstream banks, such as Barclays and Lloyds. Just five of the big banks account for 85% of the credit extended to small and medium-sized firms, which can’t issue bonds or go directly to financing markets the way big businesses can.

Sales are a funny thing.  They don’t come in equal weekly amounts.  Even if they did customers don’t pay in equal weekly amounts.  Sometimes they pay 90 days after being invoiced.  Not the same with payroll.  Or other business costs.  That do come in equal weekly amounts. And have to be paid weekly.  Which is why business needs to borrow money.  For those times when sales are slow.  And when customers are taking longer to pay.

This is not as big a problem for the big businesses.  Who can sell bonds and have access to other financing.  But for small business, the number one employer in most countries, it’s a big problem.  And it’s a big problem for the economy in general.

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The European Central Bank Acts to add Liquidity to European Banks

Posted by PITHOCRATES - January 7th, 2012

Week in Review

The European Central Bank (ECB) offers up some cheap loans to add some liquidity to the Eurozone economy.  A liquidity problem caused by the Eurozone debt crisis.  Which was caused by excessive government deficit spending.  So the ECB’s solution to this problem is to throw more cheap money into the economy.  Problem solved (see Europe banks gobble up cheap loans offered by Central Bank by Henry Chu posted 12/21/2011 on The Los Angeles Times).

Faced with the threat of another regional recession, the European Central Bank said Wednesday that it was doling out more than half a trillion dollars in special long-term loans to hundreds of financial institutions in a bid to keep credit flowing…

The money, lent at the low interest rate of 1%, proved attractive to many financial institutions that are highly exposed to government debt and that have therefore found it hard to borrow commercially.

“It provides some stability to the funding of banks which have more or less completely lost market access,” said Sony Kapoor of the think tank Re-Define.

But the record response to the ECB’s offer is a sign of how dire the situation has become, Kapoor said. He warned that the new loans failed to address the heart of the euro crisis: the loss of faith in Europe’s banks and in the heavily indebted governments that stand behind them, especially in peripheral countries of the Eurozone…

Meanwhile, European government bond yields rose on fear that banks might back away from buying more sovereign debt amid pressure to reduce risk on their balance sheets.

Perhaps not.

This is why there is no easy solution to the Eurozone debt crisis.  European banks aren’t buying sovereign debt.  Because their balance sheets are full of risky sovereign debt.  So much that these banks have lost market access.  They can’t borrow because they are now risky, too.  Much like the countries of the Eurozone who are having trouble selling bonds.

All of this bad debt has resulted in a liquidity crisis.  And weakened European banks.  So the European Central Bank stepped in to relieve this liquidity crisis.  By providing low interest loans.  In hopes that these banks will use that cheap money to buy more of that risky sovereign debt.  That has caused the liquidity crisis.  And weakened European banks.

So either the banks will sit on that money to improve their balance sheets.  Or they will further weaken their balance sheets by buying more of that risky sovereign debt.  Neither which will fix the underlying problem.  Too much debt.  These countries with too much debt need more austerity.  To reduce their borrowing needs.  Before the European banks start failing.

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