Bailouts are over: debtors will fail, banks go bust and economies contract, then what?
25 November 2011
Try to standback and take the position of the guys emerging from the isolation of the Mars 500 Project. Instead of looking at day-to-day market fluctuations look at the bigger picture. It takes a while to focus but actually you can then see where we have come from since the 2007 crisis and where we are most likely going.
The global response to the 2007 and much more severe 2008-9 crises was to bail everybody out. The banks were too big to fail and so every debtor deserved support. It’s madness really and some home-owners have never been better off with interest rates so low and enterprises with very poor internal economics have staggered on regardless.
All that is about to end as global interest rates rise in a bond market crash. That is what the gradual blowing up of interest rates in Europe and the contagion that has now reached Germany tells you.
Those who have relied upon low interest rates to stay afloat with big debts are therefore about to get their comeuppance. On the otherside of this trade if you are a creditor with a weak balance sheet then you will be dragged under too by these debts going bad.
Banks in the eurozone look particularly vulnerable but as the contagion spreads around the world this will be true for banks all over the globe. It is a global banking trauma of a kind we have not seen before, or at least not since the 1930s when something very similar did happen.