Three Crises in One

Do bad things come in threes?

The European crisis isn’t just one crisis, but three interlocking ones. A banking crisis, a sovereign debt crisis, and a growth crisis all connect and make it difficult to find a comprehensive solution. The banking crisis is pretty straightforward: the major European banks are undercapitalized and face liquidity issues. This has been an issue for a long time, but it was worsened by our mortgage crisis. The losses that large European banks took on mortgage bonds that were supposed to be rated AAA cut dramatically into their capital.

Their banking crisis led to bank bailouts, which strained the capacity of some smaller nations. Their banks are much larger relative to their economies than US banks are. The sovereign debt problems fed back into the banking problems, as banks hold a lot of government bonds. Bond write-downs continue to damages bank capital. Capital-impaired banks hold back on making loans, which constrains growth. New businesses can’t get loans to start up, and existing companies can’t secure credit to expand.

Slow or stagnant economic growth undermines both the banks and sovereign credit, but the fiscal austerity that the sovereign credit crisis necessitates further weakens economic growth. And the growth is uneven, with a competitive, export-oriented core and a costly, service-oriented periphery.

What’s the solution? Labor reforms that allow for greater internal migration and a more dynamic business sector combined with tax reforms that emphasize consumption and transitional fiscal policies to ease the adjustment could substantially improve things. Europe has a lot going for it: a highly-educated and productive workforce, stable political and financial institutions, and a tremendous level of internal wealth. It’s not a basket case. But only policies that address all three issues will ultimately succeed in addressing these challenges.

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By | 2012-08-17T10:44:27+00:00 August 17th, 2012|Economics, Global Market Update, Investing|0 Comments

About the Author:

Mr. Tengdin is the Chief Investment Officer at Charter Trust Company and author of “The Global Market Update”. The audio version of each post can be heard on radio stations throughout New England every weekday. Mr. Tengdin graduated from Dartmouth College, Magna Cum Laude. He received his Master of Arts from Trinity Divinity School, Magna Cum Laude and received his Chartered Financial Analyst (CFA) designation in 1992. Mr. Tengdin has been managing investment portfolios for over 30 years, working for Bank of Boston, State Street Global Advisors, Citibank – Tunisia, and Banknorth Group. Throughout his career, Mr. Tengdin has emphasized helping clients manage their financial risks in difficult environments where they can profit from investing in diverse assets in diverse settings. - Leave a comment if you have any questions—I read them all! - And Follow me on Twitter @GlobalMarketUpd

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