Does Europe have the Guts to solve Financial Crisis?
Pablo Díaz de Rábago
June 11, 2008
European Banks have been hit as hard as their US colleagues just with the exposure to securitized debt, therefore suffering the American bubble. But the true challenge will come when European markets correct real estate prices and debtors start to default on their mortgages and the second blow hits the European Banks.
The challenge for Europe is increased by three very European conditions: lack of uniformity in the geographical spread and in the regulatory and supervisory responsibility, lack of common policies in handling the crisis and -probably the most important- lack of a single European political power to drive the solutions needed.
As of today, 90% of the 1M foreclosures in the US (5% of the total mortgage market and increasing fast) are in three states, Florida, California and Nevada; this is also likely to be the case in Europe, where Spain and the UK will be the hardest hit.
In the meantime, the US economy has already reacted and not only have banks recapitalized themselves more than their European counterparties, but swift action has split in two fronts: the US Congress and the Federal Reserve.
The US Congress is aiming at providing a floor to mortgage value. If the Frank-Dodd-FHA legislative (http://www.heritage.org/Research/Economy/wm1865.cfm) proposal is finally approved, after a price adjustment that will put prices in line with historical trends, lenders will get a Federal Guarantee to their loans and thus make them “marketable”.
In parallel, the Federal Reserve is tackling the issue of recapitalizing banks and consolidating assets back in bank balance sheets. This is done with uniform criteria so that no single State Regulator or State Federal Bank creates problems for the Federal Political power to be fair and effective.
The likely outcome of the situation in the US will most probably assign the necessary adjustments in value primarily to asset holders (pension and hedge funds as well as other institutional investors), troubled bank shareholders (because swift action is avoiding bank capital from being eroded), and then to a much lesser extent to troubled homeowners who will see the amount of their disposable income they dedicate to housing radically decrease over the next decade.
Therefore, a problem that took 17 years to fix in Japan will most probably be solved in 17 months and troubled homeowners will “win” reductions in their mortgages.
Bank assets will return to fair value, financial markets will start working again and interbank premiums return to normal.
But will Europe be as swift? Where is the comparable unified Federal Reserve Action? And the Legislative proposals?
Will the European mortgage citizen have to pay or will part of the holders and banks also take a well-deserved hit?
To clean a mess you need will, power and coordinated work. If the mess is not cleaned, our markets will not work for a long time.
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At the time of financial crises we need to come together united and try to solve the problems which are responsible for such a hazard. We need to overcome it. It is meant to bring calm to the population and markets and display government strength and stability. As a large number of people spend their money in movies, making films, sports, nowadays even on internet many sites offer internet keno casino for the people interested in gambling but there people lose a large sum of money there in such stuffs which should be minimized as the world is going through a phase where a little wastage of money could be matter of remorse.
Comment by akshay — January 14, 2009 @ 12:38 pm