Belmont Club

The subprime country crisis

A reader writes:

Eastern Europe is a mess. Many banks are probably insolvent if not for Government intervention. In addition, German and Austrian banks are in the … because of Eastern Eruope. The first link below is an awesome article from BW on this – the Germans/Austrians were at first all happy that they did not get invovled in subprime loans for housing. However, the ended up financing subprime countries!

Subprime countries? Doesn’t America want to become like Europe. Well maybe not, given how Der Spiegel describes its problems. Bureaucracy and state guidance are apparently no guarantees that the right economic choices will always be taken.

Not so long ago, Europeans thought they had dodged the worst of the financial meltdown. … “No one, including us, expected the crisis to be so severe,” says Siemens CEO Peter Löscher.

The Continent’s banks may not have written subprime mortgages, but it turns out they financed something worse: subprime countries. The former communist East is sinking into recession as Western banks choke off the easy credit that fueled Asian-style growth. Now, some pundits say, the former Soviet bloc countries are headed for a crisis on the scale of Asia’s in 1997 and 1998.

And how about subprime companies? European corporations are deeply in hock, with $801 billion in corporate debt maturing this year-nearly one-third more than in the U.S. Some, such as Munich-based chipmaker Qimonda and Swedish automaker Saab, say they are insolvent. A glut of debt-fueled private equity is proving to be a curse for others. Dutch petrochemical group LyondellBasell Industries sought bankruptcy protection for its U.S. operations on Feb. 9, just 14 months after buying Houston-based Lyondell Chemical in a $19 billion debt-financed deal. …

That’s not the way it was supposed to be. Europe’s economy was built for stability more than speed, and policymakers scoffed at the reckless Americans and their greedy bankers. Slower growth was a price Europeans were willing to pay for job protection and a generous safety net. “The German social market economy is a good model” for balancing free markets and social protections, German Chancellor Angela Merkel told the World Economic Forum in Davos, Switzerland, on Jan. 30.

And therein lies the rub: the social market model proved no better than American recklessness. To a large extent, the current global crisis is the result of a failure of information; those failures can’t be solved simply by the creation of ever-greater central bureaucracies. One of the unrecognized reasons why state intervention isn’t necessarily good is that it constraints actors from responding to new information optimally. As one German banker put it:

Deutsche Bank Chief Executive Josef Ackermann argues that, by refusing state aid, he will have more freedom to operate internationally than weakened rivals subject to government intervention. “We can determine our own fate,” Ackermann told reporters on Feb. 5.

That is to say, a bank free from government intervention is freer to act on what it regards as the right information than one which is beholden to the state. One of the things the market does best is react to facts as they unfold. The current economic crisis is largely driven by the recognition of past mistakes. But bankruptcy is now considered a bug, but to the extent that it punishes bad decisions, it’s a feature. And in the end, not all the government intervention in the world may be capable of saving Detroit or other bad economic actors. After all they’ve been given, Detroit is going under again. The Washington Post now says “GM, Chrysler Say Bankruptcy Is Imminent Without More Aid”. For the social modelers the answer is simple. Give it more money and more regulation. That fixes everything, doesn’t it? Gotta save those jobs.

Earlier today Michigan Gov. Jennifer Granholm met with the Obama administration’s auto task force to discuss the Detroit automakers’ future. Members have also summoned Fiat chief executive Sergio Marchionne to Washington later this week to talk about the Italian automaker’s potential alliance with Chrysler. … The automakers had hoped the stimulus package would boost sales in the second half of this year. But some of the stronger auto programs were killed — namely a “cash-for-clunkers” proposal from Sens. Dianne Feinstein (D-Calif.), Susan Collins (R-Maine) and Charles E. Schumer (D-N.Y.) that would encourage drivers to trade in vehicles for more fuel-efficient cars and trucks.

“Cash-for-clunkers”, eh. Were they talking about politicians? Confidence for confidence’s sake should never be invoked as an excuse to mandate a perception of the future. Nobody knows the future, not even the Lightworker.