Friday, October 28, 2011

The Latest Eurodebt "Solution"

If there's anything the latest news out of Europe shows us, it's that markets bounce around like crazy on any news at all — even news that doesn't mean very much. Of course, the market professionals (and especially their computer algorithms) like volatility. Anyway, let's take a quick look at what's been announced.

First, even after their bondholders take their "voluntary" 50% haircut, the Greeks still can't afford to pay. All the extreme austerity measures the Greek government has been forced to accept have so crippled the Greek economy that the likelihood of Greece paying anything at all is very small.

Second, European banks have been required to increase their capital reserves. Granted, their capital reserves should be a lot larger — but rather than dilute their stock too far by selling shares to raise cash, they can be expected to cut back lending even more, stepping down even harder on Europe's economic brakes.

As for beefing up the European rescue fund enough to "ring-fence" Italy and Spain (and hopefully not France), the "plan" would inspire a lot more confidence if there were a real plan. Hoping the Chinese and Russians will come to the rescue is not a "plan."

I can't wait for next month's "solution."

No comments: