Europe’s Banks Begin to Fail

Guess who did eventually bail out Greece.

An article from 2011 with lessons to learn from for today:

 

A chain reaction is set in motion—and a lot of people are going to get hurt.

The date is May 11, 1931. Creditanstalt, a little-known Austrian bank, suddenly announces it can’t make its debt payments. An unstoppable chain reaction results.

Bank failure, stock market crash, mass business closures, 25 percent unemployment, trade wars, runaway inflation, multiple currency collapses, the Great Depression, World War ii. All of it began with a little-known bank in a small country in the heart of Europe.

That is history. And it is happening again.

A similar epoch-changing event may be about to occur in Europe.

Last week it was revealed that Franco-Belgian banking giant Dexia was virtually locked out of debt markets and in desperate need of cash. Depositors began a run on the bank—withdrawing over €300 million on Tuesday alone. Investors bailed too, sending the bank’s share price plummeting into the penny stock range. On Thursday, its stock was suspended from trading while governments decided what to do.

The announcement sent Belgian and French politicians into a conniption fit. These same authorities spent billions bailing out the bank in 2008. It was supposed to be fixed.

Making matters worse: Dexia passed not one, but two European bank “stress tests” (the latest in July) with flying colors.

So if you can’t trust the banks (because they cook their books), and you can’t trust the experts and authorities overseeing them (because they are either liars or incompetent), who can you trust?

That summarizes the problem at the heart of Europe’s banking crisis: broken trust. If the meltdown of ‘08 taught us anything, it’s that confidence and trust is what banks can least afford to lose in a crisis.

Unfortunately, Dexia is far from alone. It is just the most visible time bomb waiting to implode.

Realize: In 2008, the banking system was insolvent. Three years later, the banking system is still insolvent, but now because of the massive bailouts, sovereign governments are verging on insolvency too.

But if the Europeans are barely able to keep a handle on their banks, who will bail out Greece? What about Spain and Italy? Who will pay for the war in Libya?

Events seem to be spiraling out of control. On Monday, British Prime Minister David Cameron begged European leaders to take a “big bazooka”-type approach to heading off collapse.

Specifically, Cameron wants Germany to take “collective responsibility” for Europe. A single market with a single government is needed, he says. “[Y]ou have to do the whole thing. … Time is short, the situation is precarious.”

More ominous words could hardly be spoken. Time is short. The situation is precarious. But backing Germany to take control of Europe is about the most shortsighted and condemning statement a British politician could make. Echoes of Chamberlain abound.

Full article: Europe’s Banks Begin to Fail (The Trumpet)

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