Petard

The assumption behind the commercial pantomime in Europe is that there is a crisis, a term that brings to mind bread lines in the US during the Great Depression or wheelbarrows of depreciating Reichsmarks after World Ward I.

The European crisis quantified is not one of consumer duress, though the proposed solution requires it, it is one of banking capital or the lack of it.

Banks unable to collect interest on loans (assets) must admit the loans are non performing and set aside reserves out of capital. Alarmingly bank managements are also required to engage in heightened commercial consideration by estimating the probability of recovering a percentage of the principal on which the the interest has vanished.

Managements are challenged enough to price and make loans which carry the implicit belief that the borrower is good for the principal. That optimism is undiminished in estimating, say, that there is one hundred percent likelihood that eighty percent of the principal of a loan secured by the entertaining collateral of a sovereign Greek guarantee, an example, will be recovered.

Credit markets are helpful here. Notwithstanding the headline passage of the Germans adding more to an insignificant bail out till credit markets assess that the Greeks have defaulted and the likelihood of future recovery is 33 cents on the dollar.

Inquiry beyond a Greek property tax imposed on homeowners that will not pay the tax as a condition to the release of IMF funding and German underwriting of prior banking folly is not required.

The Finns to their credit have requested collateral, preferably cash, because they have little appetite for the same Greek bonds that appeal to the IMF and ESFS (euro bailiout fund).

The flow of funds will be IMF loans and ESFS purchases of Greek bonds to be recyled in interest and principal payments to banks for previous borrowing. The new loans come with the condition that the Greeks agree to pay citizens less benefits, reduce employment, and impose new taxes on citizens who are incapable of paying the old ones.

In the end banking capital is preserved for the next quarter

Then?


http://www.nytimes.com/2011/09/30/business/global/even-if-europe-averts-crisis-growth-may-lag-for-years.html?pagewanted=2&_r=1&hp