Sunday, January 9, 2011

Recapitalizing Europe

The implications of the crash of 2008 have made one thing very clear.  China has emerged as the engine of growth in the world.  The US became the land of sub-prime loans, and Europe is the land of finely dressed paupers.  The Europe of today is not the Europe of old.

When the economic crash came, it took a second Marshall plan, with the US pouring trillions of US dollars into European banking subsidiaries, helping to prop up the western economic system.

The reality is that European bankers did not have the capital to cover the trades they held on their books. Risk management is Risk management.  You only have to look to the rogue French trader for context of the risk management controls in place during the build up to 2008.

A full two years have passed, and the only area in the world where the economic storm is still unfolding is in Sovereign European finances.  The US has many economic issues of its own, but let’s be honest.  The US Treasury, with access to the Federal Reserve system as it stands today, has a self funding structure unlike that to which the EU has access.

The EU understands it doesn’t have access to real capital on the scale that the US Fed/Treasury do.  Ergo, they’ve raised their deposited capital to 10 Billion Euros from its earlier 5 Billion.  Yes, those are real numbers.

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