Last weekend, we wrote about how the Euro-crisis should be resolved: The same way all debts-that-can’t-be-repaid get resolved–via bankruptcy and restructuring.This is the simple, fair solution to the crisis, but of course no one is discussing it because it would involve “losses.”
Once “losses” are taken, bankers who made dumb-arse loans can no longer deny their responsibility and might even get fired. And banks who took the losses might need new capital. And bank shareholders and bondholders might lose money.
Now, bankers and banks and bank shareholders and bondholders understandably don’t want to get fired or need capital or lose money. So instead of defaults and restructurings, we just get denial, finger-pointing, fear-mongering about the death of civilisation, and bailouts.
And, of course, there’s precedent for not forcing banks to take losses–because that’s exactly what we did when we bailed out our own banks three years ago.
(And how’s that working out? Oh, splendidly. The banks still aren’t lending, everyone hates bankers, there are protest movements all around the country protesting Wall Street, and Bank of America is trading at $5 a share. Clearly a great solution.)
But while we should expect bankers, bank shareholders and bondholders, and politicians to do everything in their power to avoid taking responsibility for their stupidity, the rest of us shouldn’t be duped.
All debts can be restructured, no matter how large.
All banks can be restructured and recapitalized, no matter how large.
All shareholders and bondholders lose money occasionally–it’s par for the course.
So, we should just ignore the whingeing and threats of the bankers and deal with the Euro-crisis the same way we (should) deal with all debt problems.
Fund-manager John Hussman explains:
Given the extremely high leverage ratios of European banks, it appears doubtful that it will be possible to obtain adequate capital through new share issuance, as they would essentially have to duplicate the existing float. For that reason, I suspect that before this is all over, much of the European banking system will be nationalized, much of the existing debt of the European banking system will be restructured, and those banks will gradually be recapitalized, post-restructuring and at much smaller leverage ratios, through new IPOs to the market. That’s how to properly manage a restructuring – you keep what is essential to the economy, but you don’t reward the existing stock and bondholders – it’s essentially what we did with General Motors. That outcome is not something to be feared (unless you’re a bank stockholder or bondholder), but is actually something that we should hope for if the global economy is to be unchained from the bad debts that were enabled by financial institutions that took on imponderably high levels of leverage.
See? It’s just not that big a deal. So we should start talking about it, even if the bankers and politicians won’t.
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