Some thoughts for the weekend.26 Mar 2023 12:20
It's not banks we need to worry about...its Countries.
Whilst the fallout from recent bank failures continues to grab investors attention, the real danger could be far greater.
The biggest risk of all is in Europe. A dislocated system of support by a central bank (ECB) which is not fully backed by any particular country. The Bank of England or The Federal reserve, for instance, are sovereign backed with their own currencies. The ECB has kept, mostly Mediterranean countries, afloat by buying huge quantities of those countries debt, whilst those countries just keep on spending. Where as sovereign countries central banks are backed by the state, along with its tax and currency support, the ECB has no such support network. The liability of its potential losses, on bonds it has bought, to support grossly indebted Mediterranean countries, is tenuous at best.
The anti EU movement is gaining momentum. The result of last weeks Dutch elections reveled a stunning leap in support for the recently (2019) formed, farmers backed, political party. Holland joins the likes of Italy, Sweden, France and Belgium, where EU policy, particularly environmental and immigration, is being questioned.
Additionally, it is these financially well managed northern Europe countries, that are not happy about any potential liability they share for the ECB supporting profligate Mediterranean countries.
If last weeks very unexpected attack on Deutsche Bank has any credibility, the Banks of Italy, Spain, Greece, Cyprus and potentially Ireland, will be very much in the firing line.
The ECB, unlike sovereign Central Banks, cannot defend the entire banking system of the EU, that's a fact. The Northern EU countries will not be part of it and push back on any talk of sharing the burden for countries who have failed to control, spending or tax collection.
The Euro is not a currency you want to hold at the moment as it is difficult to explain what it's value could be.
The EU is an abject failure. The North/South split of prudent fiscal management is one thing, but the North is now pushing back on freedom of migrant movement due to exploding associated social unrest, whilst the South seems powerless, due to the EU, to stop the flow and protect its borders.
Cracks are appearing in the dam but the Dutch boy seems reluctant to put his finger in it.
As a side note, Japan is reversing its huge purchases of overseas debt and that does not bode well for Europe where it has significant holdings...eg around 8% of French debt.
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