My haiku below was inspired by an apparently leaked story about a preliminary Eurozone deal to bail Greece out of its debt problems. Germany feels more comfortable doing so within the context of a Eurpoean Monetary Fund, an as-yet unborn financial mechanism that would purportedly contain future financial contagions within the Eurozone. The EMF is a cute idea but will be a long time in coming.
Meanwhile, the likely recipient list for such a fund's assistance is long and growing. Even if we assume a bailout of Greece's short-term debt load, its future unfunded liabilities will continue to grow as a result of its pension promises:
Meanwhile, Italy's municipal governments have something in common with their U.S. counterparts. They committed themselves to derivatives bets they didn't understand:
Last but not least, Spain's effort to consolidate its equivalent of failed savings and loan institutions, the "cajas," is paralyzed:
EMF or no EMF, Europe faces daunting challenges in keeping its financial house in order.
Nota bene: Anthony J. Alfidi holds short puts under EFA at the time this post was published.
Meanwhile, the likely recipient list for such a fund's assistance is long and growing. Even if we assume a bailout of Greece's short-term debt load, its future unfunded liabilities will continue to grow as a result of its pension promises:
Greece’s patchwork system of early retirement has contributed to the out-of-control state spending that has led to Europe’s sovereign debt crisis. Its pension promises will grow sharply in coming years, and investors can see the country has not set aside enough to cover those costs, making it harder for Greece to borrow at a reasonable rate.
Meanwhile, Italy's municipal governments have something in common with their U.S. counterparts. They committed themselves to derivatives bets they didn't understand:
Financial markets are gripped by the role derivatives have played in Greece's debt crisis, but Italy also has a derivatives time bomb, and hundreds of cities are in the 24 billion euro blast zone.
(snip)
Almost 500 small and large Italian cities are facing mark-to-market losses of 2.5 billion euros on the contracts, according to the Bank of Italy. Analysts say that figure will balloon when interest rates go up.
Last but not least, Spain's effort to consolidate its equivalent of failed savings and loan institutions, the "cajas," is paralyzed:
The government created a bailout fund last year to help cover the costs of consolidation. Administered by the Bank of Spain, the fund has initial capital of EUR9 billion, expandable to EUR99 billion, that it can offer to help strong institutions take over weak ones.
But the fund has yet to act because merger talks between cajas keep stalling. And experts warn that without consolidation in the sector, the squeeze on credit could tighten still further, making one of the developed world's sharpest recessions even worse.
EMF or no EMF, Europe faces daunting challenges in keeping its financial house in order.
Nota bene: Anthony J. Alfidi holds short puts under EFA at the time this post was published.
