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Dexia Vu All Over Again

Most Americans have never heard of the Dexia Group, a Franco-Belgian financial company that could be the next big turning point in the European debt saga.  Dexia has already been rescued once, as France and Belgium stepped in to provide guarantees and liquidity to keep the troubled group alive.

The ever-helpful though not always cheerful FT reminds us that the cost of the Dexia bailout could be 15 percent of Belgian GDP and 1.7 percent of the much larger French economy.  Why should you care?

Because it was guarantees to failed banks that took down Iceland and Ireland back in the early days of what looks less and less like a financial crisis and more and more like the new and very unpleasant normal.  Belgium could be toast if Dexia goes, and France could well face a downgrade that would affect the strength of the EFSF and make a general European meltdown that much more likely.

With the German bond auction failure on Wednesday and no real progress over there on Thursday, Europe is coming closer to some kind of decision point.  The Germans and the French still seem to be playing chicken with each other and the future of the eurozone; given the stakes it is reasonable that both sides want to play hardball, but the risks of a colossal misjudgment and meltdown remain uncomfortably high. It’s not entirely clear that the politicians appreciate and respect the ferocity and speed with which a crisis can whip through the financial markets, or how hard it can be to put Humpty Dumpty back together once he’s been allowed to fall.

For now we wait, we watch, and we make sure that our money is stored somewhere safe.

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  • Otiose

    All the banking systems that participated so enthusiastically in the credit bubble on the way up will sooner or later go through more or less what Iceland has lead the way into.

    Dexia stands out only because it is among the first to fail. Most European banks will follow.

    I’m struck by how many experienced and knowledgable people continue to believe that the Germans (or sometimes an undefined ‘Europeans’) have some solution at hand that they will be forced to apply soon. And this solution will allow normal (like recent past) to be reestablished.

    Very unlikely. Even if the Germans give in and provide some sort of guarantee for the ongoing refinancing of debt for the rest of Europe in exchange for (even very) significant German influence over determining fiscal budgets of the countries (a major loss of sovereignty) the new normal will only be temporary.

    The other choice is they refuse and stand by (and likely cause the ECB to stand by) as most of Europe gets a rude introduction to reality along with a serious adjustment in living standards.

    Loot at the choice from the Germans point of view. If they intervene (provide the guarantee) they will be seen as a direct cause or a direct agent causing the severe adjustment (when they veto generous budgets) downward. Germans to be consistent would only approve budgets for boundaries for pensions, retirement ages etc that are at least equal to what prevails in Germany.

    If they refuse to intervene many outside Germany will accuse them of much, but they at least will not be seen as the direct cause of the coming painful adjustments and the locals may be able to direct political action inward (vs at Germans) and toward solutions.

  • Scott

    “…and we make sure that our money is stored somewhere safe.”

    I’m open to suggestions?

  • Luke Lea

    I forecast inflation in the Eurozone (including Germany), inflation in the U.S., and inflation in China as the only way to get all three areas out of their indebtedness problems. Coordination will be necessary (but unspoken) so as not to unduly disrupt international trading relations (even though China’s currency clearly has to strengthen vis-a-vis the other two). This would be a way out, you have to admit, and as far as I can see it is the only way out. Thus I predict them.

  • Kris

    “what looks less and less like a financial crisis and more and more like the new and very unpleasant normal.”

    Let us sloooooowly peel off the bandage.

  • rkka

    In other words, we will now have our Credit Anstalt moment.

  • Kenny

    Luke Lea @ 3.

    Of course inflation is coming along with some repudiation of debt.

    The question is how much inflation.

    The Masters of the Universe — the self-anointed elite — will try to get out of mess they’ve created both her eiand in Europe via controlled inflation.

    But ah, inflation is like fire; it can quickly get out of control and burn the whole house down.

    That’s why people are buying Au and Ag.

    Acquiring these metals is not an investment per se but rather insurance against the house getting burned up.

    Got any?

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