NUEVA CRISIS FINANCIERA: LECCIONES NO APRENDIDAS DEL PASADO (SATYAJIT DAS)

 

New financial crisis, lessons of past unlearnt

A new financial crisis has begun...

The central element is cash flow. The conversion of trade and activity will reduce incomes for households and businesses, decreasing consumption, which makes up around 50 to 70 percent of economic activity. Slowing demand reduced the need for investment. Government spending is unlikely to make up the shortfall due to an obsession with spending cuts, the constraint of rising budget deficits and high debt levels. Fear of wars means many countries must trade-off ‘guns and butter’. Rentier income from investments will fall. Erratic decision-making and reciprocal economic stupidity will heighten uncertainty and sap consumer and business confidence.

Cash flows drive asset prices. The values of all financial assets ultimately depend on their future earnings. Actual or, in the case of nascent businesses, the likelihood of future earnings will decline, bringing down the prices of shares and real estate. Even with the recent buoyant economy, many businesses are not profitable or don’t have positive cash flows. Others with high leverage can barely cover interest payments. Enthusiasm for speculative investments, like AI projects, which have generated few compelling revenue-generating products, is waning. The ‘greater fool theory’ that you can always sell at a higher price to someone was always financial charlatanism. 

(...)

 The principal weakness is debt, which there is no shortage of. Without nose-bleed borrowing levels, cash flow decreases are tolerable. If equity is a soft bed, debt is one of the nails. Tariffs and sanctions will raise price pressures and make it difficult to return to the ultra-low rates that made excessive indebtedness sustainable.

 As incomes fall, households and businesses will struggle to meet obligations. Fiat money allows governments to continue the game by debasing the currency and purchasing power. Incapable of repaying borrowings, they will continue to issue new debt or create money, effectively paying interest and principal with new obligations they cannot honour.

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A highly interconnected financial system is the main pathway through which contagion is transmitted. Potential losses are considerable. Global exposure to commercial real estate is around $21 trillion, primarily bank loans. Non-investment loans and bond outstandings are around $5-6 trillion. Equity margin loans in the US are around $1 trillion globally, probably 3 or 4 times that. Many now have diminishing margins of safety. Some have negative equity—the asset value is less than the loan. Global bank equity is around $6-7 trillion. Banks are leveraged 8 to 10 times higher if ‘funky’ hybrid capital and bail-in securities do not work as intended. Large losses would be systematically relevant, placing some at risk of insolvency and threatening financial stability.

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 The diminished supply of capital will affect the value of existing ventures, many of which do not have sufficient liquidity to reach the operational stage.

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The process is one of downward spiralling feedback loops. Losses lead to lower leverage and credit contraction, which lead to economic retrenchment and credit contraction, which sets off a new round. Illiquid markets, due to falls in market makers, struggle to handle demand, worsening conditions.

The severity of the new crisis remains unknown. A real economic slowdown comparable to the 1930s is not inconceivable. Large financial excesses, particularly the disjunction between cash flow and prices, make severe adjustments likely. A complicating factor is institutional memory from the 2008 crisis is now scarce. It would not help in any case because, as Harry Potter’s Lord Voldemort observed, “[Humans] never learn. Such a pity.”

Dysfunction, debt, drag on efficiency,European decline

El declive Europeo: la disfunción, la deuda, el lastre de la eficiencia

 

As Europe is discovering, the past is rarely past. Weaknesses exposed by the forgotten 2011 European debt crisis remain unresolved.  Five areas of unaddressed concern remain.

 

First, European growth is lacklustre. Between 2010 and 2023, European GDP grew cumulatively by 21 percent, compared to America's 34 percent. Current forecasts project medium-term annual real growth at around 1-1.5 percent. Causes include low investment in infrastructure, new technologies, research and development, and poor productivity improvements. Weak consumption and high saving rates reflect low consumer confidence.

 

(...)

 

Intra-European trade relies on recycling German savings and trade surpluses to net importing Mediterranean and Eastern European nations to finance purchases of Germany's exports. The substantial internal financial imbalances were exacerbated by the European Central Bank (ECB) bailouts of crisis-afflicted Greece, Cyprus, Italy, Portugal, Spain and Ireland in 2012. Germany is now owed over €1 trillion mainly by Italy, France, Spain, Portugal and Greece.

(...)

The replacement of cheap Russian gas imports with expensive US and Gulf LNG has increased costs by 30-40 percent, creating new dependencies.

Non-wage items, such as social, unemployment, and medical insurances, add up to 40 percent to labour costs. Europe's unfunded overgenerous welfare state, including relatively early retirement and generous pensions, is unsustainable. Overzealous, complex, overlapping regulations are a drag on efficiency. Brussels' intervention adheres to the principle of all extraneous bureaucracies—self-perpetuation and mission creep. 

 

Second, debt. EU's government gross debt is nearly 88 percent of GDP. The highest debt levels are Greece (164 percent), Italy (137 percent), France (112 percent), Belgium (108 percent), Spain (105 percent), and Portugal (101 percent). Due to its legislated debt brake, which limits borrowing but may be loosened, Germany's debt to GDP is a more modest 62 percent. However, like some other member states, it has substantial unfunded pension liabilities. The EU's own separate debt is expected to reach €900 billion by the end of 2026 to fund coronavirus recovery programmes and support for Ukraine. This limits the ability of state investment in infrastructure renewal or boost domestic demand directly.

 

(...) 

 

France's debt costs recently exceeded those of Greece! There is no plan to restore public finances.

 

(...) 

 

Third, the Euro's structural flaws continue. The inability to devalue or set individual monetary policy limits the flexibility of members with different requirements. At the same time, there is no common fiscal policy because of Germany's reluctance to de facto financial underwrite EU common debt. A currency without a country and states without a sovereign currency severely restrict policy options.

Fourth, security concerns.

(...) 

Unless the conflict is resolved, the EU's determination to continue supporting Ukraine in combat and reconstruction will strain its finances and industrial capacity. An additional constraint will be the need to support large numbers of refugees from Ukraine (estimated at over six million). Continued instability in the Middle East and Africa will result in a steady flow of displaced people into Europe, further pressuring resources.

 

Finally, political dysfunction, as Germany and France demonstrate, means that Europe is incapable of enacting the policies and reforms needed to manage these pressures. The electorate in member states has fragmented into far right, far left and centrist groupings, often of roughly equal size. Voters, many of whom share a pathological dislike of governments and elite politicians and bureaucrats, have shifted support from traditional parties to more extreme populist movements. Central concerns include sovereignty, immigration and border security, and disagreements on social issues around diversity and inclusion. Economic disagreements revolve around living costs, housing, sounder public finances, and expansion or preservation of existing welfare benefits. Even where these parties are unlikely to rule, they now set the political agenda.

Lack of governing majorities means unwieldy and unstable coalitions with contradictory political positions. Victor tyranny and lack of the loser's consent lead to continuous trench warfare, preventing action. 

 

(...) 

Problems will move from the periphery (smaller states) to the EU core (Germany, France, Italy). While Europe's size and wealth make immediate collapse unlikely, the trajectory is one of steady decline punctuated by successive crises, which may prove impervious to the ECB's 'whatever it takes' mantra.

LOS BANCOS CENTRALES: EL LEGADO DE LOS MANDARINES FINANCIEROS ("EL PUT DE GREENSPAN")

#Centralbanks: The #legacy of #monetarymandarins https://t.co/P12unEzhKZ

Who created #serialspeculativebooms to sustain the illusion of prosperity & of #governments who deflected #shifting #hardpolicymaking to #unelected and largely #unaccountable central banks#satyajitdas

— Guillermo Ruiz Zapatero (@ruiz_zapatero) November 19, 2024

 

The rulebook expanded after the 2001 dot-com problems and the 2007/8 financial crisis. The staple was interest rates. When they approached zero, central banks innovated with negative rates and implemented quantitative easing (QE), purchasing securities, government bonds, but later including mortgage-backed securities, corporate bonds and shares, using newly created reserves.

Central banks implemented yield curve control (YCC) to target specific rates.  Policymakers introduced financing arrangements to provide funds to banks to bolster liquidity and also on-lend to clients. Critics joked that central bankers would deploy these tools to even combat an alien invasion.

But labour market changes—particularly the shift away from permanent work and reduced wage bargaining power in part due to reduced unionisation and industrial overcapacity—especially in China, kept prices in check. Inflation remained stubbornly low until the supply shock of the pandemic and military conflicts. The use of low rates to devalue the currency to increase export competitiveness floundered because every country followed similar strategies.

The real effect was on asset markets. As values reflect future cash flows discounted back to the present, an upward shift in prices was natural. Near zero rates meant the adjustment was exaggerated.

Low rates drove a search for higher returns, causing investors to overpay for long-duration bonds, high- and low-quality corporate debt, equities and real estate. It enticed investment in illiquid assets like infrastructure, private debt and equity, and venture or start-up capital. It encouraged increasing leverage to enhance available returns.

Intervention by the authorities and their underwriting of risk-taking suppressed volatility. This encouraged investors to sell options to enhance their returns through the premiums received. Asset managers employed investment strategies, often camouflaged under innocent names such as ‘risk parity’. There were pernicious feedback loops, with falling returns leading to more risk-taking, compressing yields and margins boosting prices further.

These developments have significant costs. First, the policies encouraged rapid growth in private and public debt. It facilitated fiscal indiscipline of governments who ran large budget deficits. An economic model of consumption and investment using borrowed funds became entrenched.

Second, capital was misallocated. Easy money allowed the survival of ‘zombie’ enterprises—indebted businesses that generated sufficient cash to cover costs and loan interest but not sufficient to invest in operations or repay the debt itself.

Third, asset prices became detached from intrinsic values, creating the constant spectre of financial instability. Rising prices for financial assets favoured high-income, wealthy cohorts exacerbating inequality.

Fourth, it fundamentally altered financial markets. Abundant cash, low rates and YCC artificially reduced risk. The US Federal Reserve, the Bank of Japan, the Bank of England, and the European Central Bank hold around 16, 53, 27, and 30 percent of outstanding government debt. The Bank of Japan holds around 7 percent of the stock market. The Swiss National Bank has a share portfolio (consisting mainly of US stocks) of around $200 billion (around 20 percent of GDP). This overhang and potential central bank activity distorts prices and liquidity.

Fifth, speculation and risk-taking are now underwritten by the ‘Greenspan Put’. Investors assume in case of problems, central banks will step in to ensure survival of banks and institutions deemed ‘too big to fail’.

Sixth, the ability to normalise policy settings—increasing rates or selling asset holdings—is restricted. Higher interest costs would increase the risk of financial distress for the growing numbers of over-indebted borrowers. Governments with high debt levels face larger financing expenses and must raise taxes or cut spending elsewhere. This, combined with falling collateral values, threatens lenders. The current pressure on central banks to cut rates reflects, in part, these pressures.

Finally, the policies generated toxic interest rate exposures that damaged balance sheets. QE created an asset liability mismatch as central banks purchased longer maturity securities with modest fixed rate coupons, funding them with reserves paying short-term rates. When rates rose in 2021 to counter inflationary pressures, the value of these bonds fell sharply. Central banks now have large unrealised losses that would be crystallised on sale. Their income is affected by the higher interest paid on reserves, below the earnings on the bonds.

Major central banks are now nursing Major central banks are now nursing large market-to-market losses and some have negative shareholder’s funds—not ideal for the guarantor of the financial system. The mismatch affected commercial banks, who used the liquidity provided by central banks similarly, investing in long-dated assets to boost income. This was behind the problems of US regional banks in 2023.

History will not be kind to central bankers fixated on financial economy and who created serial speculative booms to sustain the illusion of prosperity. It will also be critical of governments unwilling to address weaknesses, who deflected shifting hard policymaking to independent, unelected and largely unaccountable central banks.

(Views are personal.)

Satyajit Das

Former banker and author

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SATYAJIT DAS: END OF EMPIRE-1-WORLD OF DIVIDES

#End of #Empire – 1: World of divides and why #India may adapt to a more closed economy better https://t.co/6i23STiYI3 via @NewIndianXpress #satyajitdas

"There are decades where nothing happens, and there are weeks where decades happen".

— Guillermo Ruiz Zapatero (@ruiz_zapatero) October 5, 2022

 

 

 

 "There are decades where nothing happens, and there are weeks where decades happen". Lenin’s phrase – there are doubts as to the attribution - describes periods when established economic, power and social relationships are challenged and sometimes overturned, often violently. The question is whether this is one of those times.

Today, there is a sharp division between the 'West' -- the USA and its Anglosphere acolytes (Canada, Australia, New Zealand) supported unenthusiastically by Europe and Japan --- and the rest of the world. Positions on the Ukraine conflict highlight the schism. Support for Ukraine is primarily Western, representing less than 20 per cent of global population. The vast majority of nations have refused to condemn Russia's actions or profess neutrality on the matter. China professes cautious support of Russian grievances.

While couched in bromides about shared values and unity, European and Japanese support of the Anglosphere is self-serving. Both have benefitted from American military protection and lower defence spending which has been diverted to more productive activities. It reflects the reality of geographic proximity to Russia and China as well as greater economic connections.

The non-Western position reflects caution about great power conflicts, economic factors, often complicated colonial pasts and experience of Western hypocrisy and self-interest. There are legitimate questions about the support for Ukraine, especially the provision of generous financial and humanitarian aid. The favoured treatment of white, Christian refugees relative to victims of conflicts and disasters in the Middle East, Asia and Africa has not gone unnoticed.

This division threatens the current global order overseen by America.

(...)

 complete deglobalisation and a retreat to autarky are unlikely due to intricate connections and more importantly the effects on availability and cost of products. Instead, increased re-, near- or friend-shoring may separate the world into trading blocs reinforcing divisions.

The combination of the identified stresses has set up feedback loops which will reshape the current economic and power relationships.

 Winners and Losers

 All nations are affected by these changes but not equally. A drift to more closed economies may not favour the West.

Functioning as an isolated entity or bloc requires a sizeable population, resources (food; water; energy; raw materials) self-sufficiency, necessary technologies and skills and the ability to defend your interests. Alternatively, you must be able to access these elements from within your trading bloc or from partners.

One reason that trade restrictions and sanctions have had less effect to date than expected is that Russia possesses many of these characteristics. In addition, absence of universal compliance reduces the effectiveness of these measures. Non-West countries, such as China and India, benefit from sanctions, being able to purchase oil and gas at significant discounts. Attempts at enforcement, such as a proposed oil price cap, may not be successful without excluding violators from global payments, insurance or sanctions which would widen the divisions substantially.

 

The US is substantially self-sufficient in food and energy. However, it has outsourced large components of its manufacturing and would have to re-skill its workforce to re-shore activities. It also requires export markets for its advanced products -- 40 per cent of S&P 500 companies’ revenue originates outside the US.

(...)

Europe and Japan are oriented to manufacturing but reliant on imported raw materials, especially energy. Japan also has a growing reliance on imported foodstuffs. They are large exporters, with significant reliance like the Anglosphere on the Chinese market.

¿ES INMINENTE UNA NUEVA CONGELACION DEL CREDITO?

The Bagehot Post: From Green to Red – Is Credit Crunch 2.0 Imminent?...: From Green to Red – Is Credit Crunch 2.0 Imminent? : Satyajit Das is author of Traders, Guns and Money: Knowns and unknowns in the dazzling ...

LA CRISIS DE LA DEUDA EUROPEA

LA CRISIS DE LA DEUDA EUROPEA SEGÚN SATYAJIT DAS

SIGUEN EXTRACTOS AMPLIOS DEL ANALISIS EN INGLES DEL CITADO AUTOR

DE LA PARTE 1 (4 DE ENERO DE 2011):

Misión Interrumpida

(…)

“As of August 2010, the level of ECB funding was as follows:


Euro (billions)
% of Deposits
% of Gross Domestic Product
Greece
96.1
26
40
Ireland
95.1
14
60
Portugal
50.1
15
30
Spain
119.0
5
11

Following the Irish crisis in the second half of 2010, the funding demands on the ECB have increased. Ireland’s borrowing from the ECB has reached Euro 136 billion (86% of Gross Deposit Product ("GDP")), around a quarter of Euro-zone member drawings on the facility.

The ECB has expressed concern about Europe’s "addicted financial groups". But with banks affected by their sovereign’s debt problems and maturing debt not being rolled over, the ECB has little option but to continue the arrangement.

The approach of the EU/ ECB assumed that the problem was temporary liquidity not solvency. The solution was to ensure that the troubled countries could continue to finance. The restoration of confidence would enable a rapid return to market financing and the status quo.

Nothing exemplified this better than the ill-conceived and poorly designed EFSF. Amongst the multiplicity of problems were the limited guarantees from Euro-zone countries and a reliance on CDO rating methodology. The preliminary analysis of the EFSF by the credit rating agencies confirmed the view that the facility was not designed for use. Close inspection also revealed that the facility was only capable of being drawn for an amount as low as Euro 250 billion, well short of the advertised Euro 750 billion. It was a pure confidence trick.

DE LA PARTE SEGUNDA (5-01-2011):

(…)

PLATOS AMARGOS

The EU and IMF are hoping that the bailouts of Greece and Ireland will restore market confidence. In combination with stronger growth, greater fiscal discipline and domestic structural reforms, they hope that the fear of default or restructuring will recede. Eventually, the troubled countries will regain access to markets. The emergency facilities and support mechanisms will be gradually unwound. While not impossible, the chances of this script playing out are minimal.

A more likely scenario is that the support measures do not work and increasingly Portugal and Spain, initially, find themselves under siege. As market access closes, they too will need bailouts straining existing arrangements, necessitating new measures. If Portugal (debt around Euro 180 billion) was to require assistance, then it will reduce the available funds in the existing EU’s bail-out mechanism. Spain (with debt of over Euro 950 billion) is simply too big to bail out using the present facilities.

Under such a scenario, available options include greater economic integration of the EU, expansion of existing arrangements or a decision to allow indebted countries to fail.

Greater economic integration would entail adoption of a common fiscal policy, encompassing strict controls on fiscal policy including tax and spending. It could also include the issue of Euro zone bonds ("E-Bonds") to finance member countries. Championed by Jean-Claude Juncker, Luxembourg’s Prime Minister and chairman of the Euro Zone finance ministers’ meetings, the E-Bond would lower borrowing costs for peripheral economies and facilitate access to markets.

Fiscal union would prevent default of over-indebted borrowers without necessarily addressing the fundamental problems of individual economies. The likelihood of greater fiscal union in the near term is limited, as it is unlikely that nations will surrender the required economic powers and autonomy.

The E-Bond proposal, for up to 50% of a State’s funding requirement, is unworkable given large differences in credit quality and interest rates between Euro Zone members of around 10%. The E-Bond credit support structure would resurrect the ill-fated EFSF on a larger scale.

In any case, Germany takes the view that national governments should bear responsibility for their own decisions. Germany also opposes E-Bonds, as they would increase its borrowing costs. France’s early enthusiasm for E-Bonds seems to have diminished.

The cost of full fiscal union is prohibitive, entailing between Euro 340 billion and Euro 800 billion, depending on the degree of fiscal imbalances. Much of this cost would have to be borne by Germany and other richer economies.

If Portugal and Spain experience problems, then in absence of a full fiscal union, the only available actions are further EU support or default.

There have been proposals to expand the EFSF/ ESM as needed. While Germany currently has opposed any expansion, it remains an option. Perversely, increasing the funding available to support troubled countries may signal that problems were imminent, with a resulting loss of confidence necessitating a bailout.

The ECB can increase support for the relevant countries, in the form of purchases of bonds or financing Euro Zone banks to purchase them. Interestingly, the ECB will increase its capital base, from Euro 5.76 billion to Euro 10.76 billion by end 2012, the first such increase in its 12-year history. The increase in capital allows greater support from the ECB, whilst providing reserves against potential losses.

In an extreme scenario, the ECB could simply print money, following the US Fed’s lead, to support its members, known technically as "unsterlised purchases". Such action may not be permissible under its existing rules, requiring amendments to EU treaties. It would severely damage the ECB’s already tenuous credibility and be resisted by Germany and other conservative EU countries.

"Extend and pretend" measures would allow orderly default or debt restructuring by some countries over time. It minimises losses, controlling the timing and form of restructuring. It would also minimise disruption to financial markets and solvency issues for investors and banks with large exposures.

If the EU does not agree to fiscal union or continuing support, then pressure on Portugal, Spain, Italy and Belgium may reach a tipping point, making default or restructuring the likely end game. Presumably, existing programs, such as those for Greece and Ireland, would be suspended. Governments would announce debt moratoriums, defaulting on at least some debts and forcing write downs. This would be followed by a domino effect of defaulting countries within Europe.

The defaults would affect the balance sheets of banks, potentially forcing governments, especially in Germany, France and UK to inject capital and liquidity into their banks to ensure solvency. The richer nations would still have to pay, but for the recapitalisation of their banks rather than foreign countries.

(…)


Large volumes of maturing debt mean that the test is likely to come sooner than later. The heavily indebted European sovereign states face $2.85 trillion of maturing debt in the period to 2013. Portugal, Italy, Ireland, Greece and Spain have bond maturities of $502 billion in 2011. The financing needs of Greece, Ireland, Portugal and Spain over the last quarter of 2010 and 2011 are Euro 320 billion, rising to Euro 712 billion if Italy is included. In addition, private sector borrower in these countries face maturities of $988 billion of corporate bonds and $200 billion of syndicated bank loans over the same period. Likelihood of low economic growth, failure to meet IMF plan targets, further banking sector problems and credit downgrades exacerbate the risk.

If Europe muddles it way through the refinancing crisis, then the expiry of existing support facilities in 2013 and the changed regime of the ESM poses new risks and may continue the instability.

DE LA PARTE TERCERA (6-01-2011):

UN CONTINENTE LEJANO


(…)

China, which contributed around 80% of total global growth in 2010, has expressed growing concern about the problems in Europe. Trade between China and the EU, its largest export market, totals around $470 billion annually, contributing a trade surplus of Euro 122 billion for China in the first nine months of 2010. Any slowdown in Europe would affect Chinese growth. China is also a major holder of Euro sovereign bonds, standing to lose significantly if problems continue. China has indicated preparedness to use some of its $2.7 trillion of foreign exchange reserves to buy bonds of countries such as Greece and Portugal.

A slowdown in China would affect commodity markets, both volumes and prices, and commodity exporters such as Australia, China and South Africa. Minutes of a 7 December 2010 from the central bank of Australia, one of the world’s best performing economies, indicated increasing concerns about developments in Europe.

A continuation of the European debt problems, especially restructuring or default of sovereign debt, would severely disrupt financial markets. Losses would create concerns about the solvency of banks, in particular European banks. In a repeat of the events of September 2008 (when Lehman Brothers filed for bankruptcy protection and AIG almost collapsed) and April/ May 2010 (prior to the bailout of Greece), money markets could seize up, as trust about the ability of parties to perform contracts evaporated. In turn, this volatility would feed through into the real economy, undermining the weak recovery.

Unless resolved, the European debt problems will affect currency markets and through that channel the global economy. Any breakdown in the Euro, such as the withdrawal of defaulting countries or change in the mechanism, would result in a sharp fall in the new currencies. In turn, this would, in the first instance, result in large losses to holders of debt of those countries from the devaluation.

Depending on the new arrangements, the US dollar would appreciate abbreviating the nascent American recovery. This may compound existing global imbalances and trigger further American action to weaken the dollar. Further rounds of quantitative easing are possible, setting off inflation and de-stabilising, large scale capital flows into emerging markets. In turn, the risk of protectionism, full-scale currency and trade wars would increase. A breakup of the Euro would adversely affect Germany, which has been growing strongly. A return to the Deutschemark or, more realistically, an Euro without the peripheral countries may result in a sharp appreciation of the currency, reducing German export competitiveness.

As the Australian central bank noted in its December 2010 minutes: "… the deterioration in the situation in Europe over the past month had increased the downside risks to the global economy. How this would ultimately play out, and the implications … were difficult to predict. It was possible that conditions could settle down, as they had after the episode of financial instability in May. Alternatively, an escalation of the current problems was not out of the question. If this prompted a fresh retreat from risk-taking in global financial markets, it would probably have more impact … than any trade effect."

FINAL DE LA PARTIDA

Events since the announcement of the bailout package in early 2010 have been reminiscent of 2008. Then, the optimism following bailouts of Bear Stearns and other troubled American banks produced premature. The promise of China to purchase Portuguese bonds is similar to the ill-fated investments of Asian and Middle-Eastern sovereign wealth funds in US and European banks.

Eventually with each successive rescue and the reemergence of problems, the capacity and will for further support diminished. The EU rescue of Greece and Ireland are also reminiscent of US attempts to rescue its banking system, with more and more money being thrown at the problem. The strategy was defective, preventing the creative destruction required to restore the system to health. The actions may have doomed the economy into a protracted period of low growth, laying the foundations for future problems.

At the time of the Greek bailout, the real question was: "If Euro 750 billion isn’t enough, what is?" Increasingly, markets fear that there may not be enough money, to solve the problem painlessly.

In 11 May 1931, the failure of a European bank – Austria’s Credit-Anstalt – was a pivotal event in the ensuing global financial crisis and the Great Depression. The failure set off a chain reaction and crisis in the European banking system. Some 80 years later, European sovereigns may be about to set off a similar sequence of events with unknown consequences. As Mark Twain observed history does not repeat, but it may rhyme.”

© 2011 Satyajit Das

Satyajit Das is the author of "Traders, Guns & Money: Knowns and Unknowns in the Dazzling World of Derivatives".

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