Government Dominoes Topple
The European Banking Crisis: Next Phase
by Gary North
The European banks are still in deep trouble. They are being protected only by the ability of the politicians of the PIIGS to persuade the public that they will be able to maintain interest payments in the near term. Investors care nothing about long-term prospects. They assume that they can sell bad bonds to the next group of naïve investors. Each group assumes that those who follow will be suckers. They regard themselves as sophisticated investors who know what will happen and who will be able to unload the bonds on really stupid investors.
This is known historically as greater-fool investing. It always prevails in the final stages of a bubble.
Last May, I wrote of the crisis in Greek government financing that we should not expect much from the Prime Minister’s assurances that there would be tight austerity measures imposed on the nation, especially its government sector. In an article titled, “PIIGS Win. Bankers Win. Voters Lose,” I wrote:
As for cutbacks in Greek spending, ho, ho, ho. As for austerity in Southern Europe, ha, ha, ha. Once you owe the banks up north a trillion dollars, you will get the politicians up north to sell more debt, so that you can meet your interest payments to their banks, and then sell more debt at low rates.
Debt will rise. That is the inescapable reality of moral hazard. Bank profits will go on, because bank losses are transferred to sovereign governments. Nothing has changed. The same old system rolls on.