Defaulting banks - where will it stop?

[Jan Klimkowski]

The analyst known as "Mish", who's been pretty accurate throughout this crisis has just offered his views on the latest EU plan to "restore confidence".

Draft Statement: Europe Guarantees Bank Debt

YahooFinance has a Draft summit statement says euro nations would guarantee bank debt.

Countries that use the euro will temporarily guarantee future bank debt to encourage lending and ease the credit crunch, according to a draft statement under discussion by European leaders Sunday.

The declaration says the governments would guarantee "for an interim period and on appropriate commercial terms" new debt issued by banks for up to five years.

"This scheme would be limited in amount, temporary and will be applied under close scrutiny of financial authorities until Dec. 31, 2009," it says.

The leaders of the 15 euro-zone nations held an emergency summit Sunday night in Paris to seek European solutions to the financial crisis engulfing markets worldwide. The meltdown dominated summits around the world this weekend.

The statement also says that one way governments could save banks would include buying big stakes.

British Prime Minister Gordon Brown, who met with France's President Nicolas Sarkozy before the euro summit, said the plan "would involve not only more cash in the financial market but also a recapitalization of our banking system.

"And allied to that -- something that I believe is absolutely crucial -- to begin again the funding of businesses and mortgages with a guarantee given by governments. That can happen and will happen in the next few months," he told reporters.

Guarantees for 5 years, Close Scrutiny For 1 Year

Notice the discrepancy between the length of guarantees and the scrutiny over them. Also note that the UK has upped the guarantee ante to include mortgages. Wonderful.

Guarantees Creep Up

Notice how the length and scope of the guarantees is creeping up. It started with 1-2 years, went to 3 years, and now the EU is proposing guarantees for up to 5 years and that "no financial institution of systemic importance" can be allowed to fail.

Hells bells, why pussyfoot around with this stuff? Let's just have every country guarantee everything forever. And if it comes to that (which it rapidly seems to be doing), one must stop and think about the value of those guarantees.

The conclusion to his article, entitled "Worthless Guarantees and Printing Presses" is that:

Of course governments have something that insurers don't. That something is a printing press. However, there is theory and there is practice. There is a price to pay for those government guarantees. We have already seen the complete collapse of Iceland's currency.

Blanket guarantees of everything will eventually end in a collapse of some major country or some major currency, the breakup of the EU, or a global depression of some sort, perhaps all of the above.

All those government guarantees, just like the guarantees of Ambac and MBIA , are totally worthless, just in different ways.

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The full article is here:
http://globaleconomicanalysis.blogspot.c...nting.html