Today's news tells me the Eurozone has reached an agreement on closer fiscal integration, minus the U.K. There are other, more ominous, signs, though they may not accurately reflect response to this. Time will tell. The important point is that EU leaders have agreed to give up significant aspects of fiscal sovereignty without waiting for public support for such an idea to materialize.
The U.K. demur was predictable. It has had both a continuously functioning democracy and economy longer than any of the other big participants. Giving up any scrap of control over budgets would likely result in a vote of "no confidence" at home. It also has a central bank which has done a good job of protecting the "City of London" from the collapse of other economies. This makes those financial institutions lumped together as "The City" prime targets for ECB regulators looking for more capital.
Counterbalancing this change designed to bolster flagging economies we find that Moody's has now downgraded debt of three major French banks: Credit Agricola, BNP Paribus, Societe Generale. Among the criticisms motivating this we read that they are carrying too much debt and risk, which we knew, and also that they rely too much on "wholesale financing".
The problem is that individual investors are staying away from these institutions. Only governments moved by concerns far removed from return on investment, or institutions which would collapse if they did, will lend to them. In fact, individual investors are not simply wary about interest, they are deeply concerned about losing any principle they lend.
This might be blamed on lingering memories of the meltdown in 2008, if not for another piece of news. Jon Corzine, former CEO of bankrupt MF Global Holdings, has publicly said he doesn't know where about $1.2 billion of investors' money is. This might seem a trivial sum to Congressional movers and shakers, but to investors it represents real money. If the CEO doesn't know what happened or where it went, common assumptions about accounting practices and regulatory oversight are null and void. Even the late "Jimmy the Greek" didn't have the temerity to use this excuse, he was a reputable bookie.
None of the measures taken to date solves more than short-term crises of liquidity. Investors are still faced with two possible interpretations for events in the recent past: 1) even the top dogs in financial institutions don't know what is going on; 2) fraud is an essential tool of high finance. With this level of uncertainty about what is going on inside financial institutions I will be one of those individual investors withholding loans.
Blog entry posted by anciendaze, Dec 9, 2011.