On Why Europe and China Might Join Russia as Serious Economic Problem Areas If Russia has economic woes, so does Europe, simply a different collection of ailments. Russia may follow, but its upheaval is now tied to its currency woes. Europe is in trouble for three reasons. First, even counting the economic powerhouse of Germany, fourth largest economy in the world, Europe is hovering at the edge of a triple dip recession, and had negative growth in the third quarter. Secondly, Europe is having political problems holding the Eurozone together. Several renegade countries, like Greece, Spain and Italy, would like to have their own currencies and monetary policy, and they have been chaffing under German led austerity policies. Finally, as we learn from Moodys this week, the European banking system is drowning in bad debt, mostly from non-performing loans. Europes banking system is the focus here, with a word on China. Any doubt that Europe is heading towards another debt crisis has been dispelled by data compiled last week by the Moody’s rating agency on the state of the European banks. For starters, the data reveal a disturbing increase in the non-performing bank loans in a number of key European countries. This comes at a bad time as the Europe is at the brink of recession and European inflation remains stuck in the deflation danger-zone. The new data compiled by Moody’s show a rise in non-performing loans to over 10% of total bank loans in Italy, Portugal, and Spain. (A good ratio is 1.2 percent.) The bad debt of all European countries is estimated to be about 9 to 10 percent of European GDP. As troubling, this non-performing loan figure ignores each countries large holdings of its own sovereign debt, which is of dubious quality yet treated by European regulators (and Moodys) as risk-free assets. The need for a major European bank bailout looms at a time when public sector debt to GDP is unsustainable and already over 130% in both Italy and Portugal, which lack sovereign currencies and therefore any self remedy. The need could become dire should the European economic recovery falter further and Europe move further towards deflation. So we have Russia in the toilet, Europe at the bowls edge and China looking at a likely harder landing than expected because its growth is slowing too fast , its housing market is bubbled up and its banking system is also loaded with almost the same percentage of bad loans as Europes. By comparison, the US looks like a bed of roses. It is not clear yet, at least to me, that we really have recovered and emerged yet from the aftermath of the 2006 crash and Great Recession.
Posted on: Sat, 20 Dec 2014 04:39:09 +0000
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