European Union: On Stranger Tides

With the climate getting even bleaker and the Greece moving forward to an evident default, it becomes even more important, to assess the situation and see how it is going to change the world. The entire European Union stands on solid tectonic plates, where small ripples have started to appear. Recent outburst of Dexia is a mere upstart of what the entire banking system is going to unleash. The story is not from another world but looks so much similar, of how it began when the subprime mortgages refused to payback any returns back in 2008.

It is evident that the liquidity in Greece is going to dry up in November. An evident default has been predicted. What we are left with is how the exposure would spread into the other Eurozone economies. Even after the second round of bailouts through France and Germany the situations have not showed any form of improvement. Today the lenders are demanding a premium of nearly 22 percent on the Greek bonds of the same nature as those of Germanic origin. There is no way possible to pump in more capital into the system. The outcome of the lack of liquidity is what is very much visible at Dexia.

Dexia is Belgium- French based financial institution. Post a government bailout in 2008 due to the subprime crisis, Dexia came to be owned primarily by the French and the Belgium government. However the contagion in the European Union, over the banking crisis has forced Dexia to ask the government for help. The crisis and the fear over a total default in Greece, has forced people to pull out assets and driven the short term lending of the banks to the ground. The short term lending in Dexia was used to finance long term bonds to match both ends. However the evaporating liquidity has turned the tables.

Bailing out the bank was a good option; however currently there are a string of infected lenders, thus it seems quite evident that the decisions would have to be more unbiased. Dexia owns around 520 billion Euros in assets out of which 200 billion are supposed to turn out bad. The size of the bank is nearly twice the size of Greek economy no less. As the decision was taken to restructure the bank a number of implications could be drawn out of it judging by the mindset of the board. The lenders board has decided to tear up the entire bank and create a troubled section that would default. Its 200 billion of bad debt has been decided to put under an entity which they called a ‘bad bank’. These measures rhetorically speak of the confusion afloat.

The French and the Belgium based units rushed into claim their own working units. It may look like a relief to prevent contagion but the exposure of all entities is so much embedded into each other that at one point the bubble is going to burst. On the larger scale, the eyes are however, fixed on the decision made by the Sarkozy and Merkel duo to solve the ongoing problem. Merkel is no longer a favourite player in German politics. Due to the repetitive bailout sessions the Germans are getting indifferent over the issue that why are they overtaxed to bailout the Greek economy. The bailout may sound quite reasonable; however in reality it is very difficult to make a commoner digest the fact.

On the other hand the French economy not very sound still commands a lot of voice in the European Union. Both of the members have to decide how they are going to take the future of the crisis forward. European Union Financial Stability was a SPV created last year. The EUFS was supposed to derive its liquidity through the financed capital from the member countries. There is a clause that states that it could loan out cash to the tune of 440 billion Euros in case of crisis to AAA credited bonds. Though the Greek bonds may no longer be high on Moody’s opinion however en-cashing this facility may be a way to go. However the system still has several constraints.

Due to the constricted market the Germans are sceptical whether they would ever be able to redeem the bailout because after all they would be the chief financiers. The French on the contrary are quite forceful on the matter to use the money right now. A bailout seems a more favourable outcome that facing austerity measures for them. The English riots are a visual example of how bad the backbone crush of the West over which the Sun supposedly smiled.

The only king maker left in market is none other than the China itself. It has foreign reserves to the tune of trillions of dollars and everyone knows in secret it is buying up bonds. China today fashions the name of the key market player not because it wants it but rather because it needs it. The survival of the West and East is so much entwined into each other that a collapse might send every other economy to the dogs. The entire buyer seller chain depends whether the China would be able sell enough to the West when they get the money that it has used to loan out to them. Thus all eyes are on this player whether it would actually be able to make it or let it fall.

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