Dick Bove solves Europe’s debt crisis in 407 words

Posted by John McDermotton Jun 23 19:49.

Diagnosis:

Misusing Savings

Recent statements by some central bankers and interested observers suggest to me that the reality discussed in Rochdale Securities comment entitled Pressure on Bank Stocks Continues dated June 20, 2011 could happen. My argument is simple:

Greece and a number of other European countries cannot repay their debt. In fact they will never be able to repay their debt under current conditions because their economies are not competitive globally.

Therefore, these countries must, and in my judgment will, repudiate their debt. When they do so a number of large European banks will be forced to take marks on the repudiated debt that will cause them to lose a great deal of money.

These banks will then raise capital in the open markets to rebuild their capital.While this process is ongoing there will be another financial crisis but one that is much less threatening than the one suffered in 2008.

This process is similar to the one that developed in Latin America in the 1980s. It was only after these countries were able to eliminate the pressure created by the need to meet debt service payments that they were able to rebuild their economies.

Cure:

Debt repudiation is actually more equitable for the lender, also. Start with the pool of savings held by European households and corporations:

This money can be used by governments to provide more funds to Greece and others. If this is done it will only increase Greece’s inability to pay it back and the money will disappear forever.

Or, the money can be used to buy stock in banks that are about to lose a great deal of money as Greece repudiates its debt.

There is a chance that over time the banks will be able to recover and the money invested here will be repaid at a profit.

It is time for the policymakers to think beyond the next debt repayment cycle and consider the core issues here. If they do they will recognize that a default is inevitable and actually the best solution to the problem even though it will not seem so in the short run.

American banks will be impacted as uncertainty builds in the international financial markets. Their actual losses, however, are not expected to be large, particularly when viewed against the massive losses incurred in the sub-prime housing industry.

It is time to take the hit that is coming. Putting it off simply makes no sense.

That’s all there is to it, as fired off by Bove on Thursday afternoon.

All we need now is to get our hands on some German savings.

Job done.

Full note in the usu… actually, it’s all there, above.

Related link:
Bove says Goldman hasn’t gotten him – FT Alphaville

This entry was posted by John McDermott on Thursday, June 23rd, 2011 at 19:49 and is filed under Capital markets, People. Tagged with , , .

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