It's sort of ironic considering the slurs leveled at American banks and at our capitalistic system during the financial meltdown. Now the EU is facing a banking crisis that may not be solvable. Don't forget that European banks got bailed out once before, and even had amazing access to secret funds, hundreds of billions of dollars, through the Federal Reserve. We see protests over austerity and know it's futile because the party went on too long and pain is an unavoidable part of any solution. But, people in many of these countries have legitimate beefs with the nature of these so-called rescues. These financial interventions aren't designed to help citizens; rather, they're drawn up to protect banks, namely German and French banks.
Initially, cash to save these banks came out of the hide of German taxpayers (and U.S., too, via the IMF), and they are too smart to accept these as necessary. Angela Merkel recently suffered giant election losses in local elections, and her ratings are tumbling fast nationwide. Nonetheless, she might be boxed into a corner in an effort to keep the dream alive. A united Europe beginning with currency, then common laws, no border rules, and a rotating counsel of leadership that morphs into a single leader. The problem is German banks are in trouble because of exposure to Greek debt. Now, it seems like the game of chicken could snare Germany and the ECB because maybe Greeks say no thanks to those bringing would-be gifts.
This drama obviously recalls our banking crisis, but it also recalls another banking crisis that ended so differently it might serve as a model for further bailout scenarios where banks are made whole (even if they have to live under temporary de facto nationalization) at the expense of citizens. Iceland was first settled by Scandinavian Floki Vilgeroarson, who supposedly named the country after its drift ice and fjords. However, lore says the real reason for the name was to dissuade visitors. The place was so beautiful those early arrivals didn't want to share their Eden. (On the other hand, Greenland was named so to seduce new arrivals by ignoring its harsh climate and conditions.)
As it turns out, Iceland should have stuck with being a big, beautiful fishing village, but it wanted to be a player. While it's true that regulations were choking economic progress, a new pro-business climate was met by crony capitalism. This was especially true in the banking sector, where a handful of insiders hooked up with big players in the UK and the Netherlands. It was a great time for all, especially super rich bankers that expanded well beyond Iceland. The party began in 2001 in part to the flood of cash that gushed out of the Federal Reserve's low interest rate policies. Banking became 9% of national output, up 100%, while fishing dropped by half to 4%. The banks were playing the game and making loans to high risk borrowers at home, the UK, and elsewhere.
The debt began to pileup at banks, but in the midst of the party nobody noticed. In 2007, 367 Range Rovers were sold in Iceland, more than Demark and Sweden combined, though those countries have a population 50 times greater.
The three largest banks incurred massive debts: Kaupting Bank $63.6 billion, Glitnin Bank $47.4 billion, and Landsbanki $49.1 billion. The $160.0 billion was 11 times GDP.
Things got so dicey in Iceland a shipment of their currency sat on an airport tarmac until the central bank could get emergency credit from a European lender to pay the British printer that was demanding payment in Sterling. Of course, the UK played hardball, including freezing assets of Icelandic banks using anti-terrorism laws. Finally, it boiled down to Iceland being offered a deal to pay UK banks $3.5 billion and Dutch banks $1.8 billion. The $5.3 billion plan was resented by ordinary citizens (presumably those without the Range Rovers) angry at hardball tactics employed by British officials who had special relationships with Icelandic bankers. This was a big bill, and the people of Iceland were expected to bailout their banks.
The country of 320,000 people would pay out $135 per month for each citizen for eight years.
The people of Iceland said no, grabbed their fishing poles and let their three biggest banks fail. The country didn't sink into the ocean. It helped that Iceland isn't part of the Euro, although early into the crisis there was talk of fast-track admission. New banks were created from the ashes and honored only homegrown creditors. Too big to fail? Too big to save was more like it.
I think Greeks should pay attention. I think German citizens should pay attention. I think Americans should pay attention.
Sure, it was painful the Icelandic krona plunged (see chart from WSJ) in value against the Euro and inflation soared, unemployment climbed from 1% to about 9%, pension funds lost 25% of value and benefits were cut in half in 2009 (again, memo to PIIGS and those in America that think austerity can be avoided).
Moreover, industries from importers to airlines suffered mightily.
But, look at Iceland now. By the third quarter of last year there was growth as GDP climbed 1.2% and inflation decreased all the way to 1.8%. It looks like the reversal is complete. Check out projected GDP trends for Iceland and Greece.
I realize Iceland is a spec compared to Greece, where the stakes are higher. But, Greece is only 0.4% of global GDP. Yes, their problems are further embedded than Iceland's, which got bit by the bug and wanted to rule the roast on high octane gas. It was a fun time, where more homes were built from 2004 to 2008 than the entire decade before, fueled by a 2003 rule change that lowered down payments to 10% from 30%. There would be massive turmoil, but the world wouldn't come to an end if Greece opted out of the Euro and took a page from Iceland.
For now, Greek officials are trying to keep it together, yesterday imposing a new two-year tax on property ostensibly to raise $2.7 billion. That may be enough for the next tranche of cash, but it's clear the pendulum of conventional wisdom holds that Greece will have to default at some point. In the meantime, banks with exposure are taking big hits, this morning's targets are said to be big French banks, Soc Gen, Credit Agricole, and BNP Paribas which are all rumored to be downgraded any minute now at Moody's. In short, there is an amazing amount of fear and skepticism in the air throughout Europe and America.
I can't connect the dots financially between European banks and our economy, but I think the fear is overblown. I think a big reason we selloff in unison is because we see our (avoidable) future from the smoke bellowing above.
The semiconductors acted great last week, and this morning the notion there is a ton of value in the sector was proven with the giant premium Broadcom (BRCM) is offering Net Logic (NASDAQ:NETL).
There is a tremendous amount of value in oil and gas equipment as those phony alternative energy projects run out of taxpayer funds around the world and the reality is that real power is needed right now to energize global growth. To this end, French company Technip is offering a giant premium for Louisiana-based Global Industries (NASDAQ:GLBL).
Once again, we begin a week under pressure, and once again we grapple with value versus faith. There is a ton of value not reflected in stocks, but faith in all the powers that could create the climate for success has all but vanished. I'm extremely excited about the former, and thoroughly frustrated with the latter. I know you are, too, but don't give up. Heck, there are going to be a number of stocks up 50% today alone and in time, many of their rivals will make similar moves. This morning there isn't a sense of urgency to force the issue. Let's see how the dust settles by noon.