Oct 01 2008
U.S. Economy: Ripple Effect Rocks Europe
With banks dropping like flies here in the U.S., one must accept that this shake-up cannot be contained within U.S. borders.
Indeed, banks in Western Europe are already following U.S. institutions into the dark abyss, and now the European Union must decide if some “bailouts” will be allowed. For example, the EU is now reviewing its decision to allow a $7 billion bailout of German bank West LB.
And some regions are looking to preemptively bail out its banks.
Ireland has just announced that it will guarantee all deposits, bonds and debts for the country’s six largest banks for the next two years.
It’s a controversial decision that some say will give these Irish banks - with international branches - an edge over other banks. But it’s also in line with what the European Commission has been wanting… Well, sort of.
The EC wants banks to, in essence, hoard cash. Like a rainy day fund, just for times like these.
According to the Commission, banks should put away more cash in order to be able to cover its riskier investments.
Of course, that makes sense, but I don’t think a lot of banks will be able to pull that off in this type of environment. In fact, this may have a negative effect. If banks take more liquidity out of the markets, there will be less money to lend, and less revenue for the bottom line.
So should governments step in and foot the bill, or should the responsibility rest solely on the shoulders of the financial institutions?
That’s just the question we’re asking here in the states… And beyond that, will things really change after the tab is paid?
The answer to that question may be different depending on where you are.
The U.S. banking system has become such an integral part of our economy, with credit lines and new securities, that any bill passed may only stop the bleeding, without repairing the damage. In other markets like Germany and the UK, this might be a similar situation.
But in growing markets - frontier and emerging markets - we may see a different result.
Where financial institutions are not as integrated with the rest of the economy, a quick cash injection may have a moderately good result.
With economies focused on exports and manufacturing rather than real estate and hedge funds, the economic engine may have an easier time getting moving in the right direction. The key will be to find out where these regions are, and time our entry.
The International Herald Tribune says that this global shake-up may even create new financial centers.
It will come as no surprise to you readers that these centers may be in emerging markets like China, India and the Middle East. I told Taipan Trader subscribers yesterday that there are still trillions of dollars floating around out there, and these particular countries aren’t just going to sit around and watch their wealth lose value as the U.S. monkeys around with a $700 billion bailout plan.
They’re going to buy things: hard assets, commodities, currencies, infrastructure.
It’s a pure defensive move, and one we should follow, too. On Friday, I’ll be giving my Defensive Portfolio Strategy to Taipan Trader subscribers, and we’ll be looking very closely at these emerging markets to see how they’re moving their money.
