Deleveraging –> Baby Steps For Now!

Leveraging did not occur overnight, and the process of “deleveraging” government balance sheets will not happen overnight either. In the aftermath of 2008, the U.S. government recapitalized banks and invested in our auto companies to prevent a financial meltdown and massive layoffs in our manufacturing base. These investments have largely been paid back in full, with the exception of AIG, which has been making gradual progress. These investments may have seemed (or still seem) crazy at the time but they were big and bold and most economists believed they helped stave off a financial collapse, prevented the recession from becoming worse than it was, and put our economy on the path to recovery.

Meanwhile, in Europe, responses to the financial crisis were far less bold, monetary actions were limited in scope, and the politics has been far messier. That’s what you get when you have 17 nations sharing the same currency, but not the same degree of fiscal discipline.

The day of reckoning has finally come, and European leaders are finally recognizing they must address their government debt issues and have begun taking small steps toward resolving their government debt overhang. A few weeks ago they announced a plan to reduce debt in Greece, support European bond purchases (like the Fed has done here), and recapitalize their banks. Markets cheered the decision, but now the slow process of implementing the plan is taking place. It will not take place fast enough to calm the markets, so expect more market volatility as Europe takes “baby steps”, wobbling towards a more stable financial future.

Both Greece and Italy have recently approved austerity plans and installed interim governments tasked to implement the debt reduction plans more quickly than current politics would allow. The European Central Bank (ECB) has a new President, and he has cut interest rates, which will help support the European governments, along with ECB bond buying activities.

Europe still needs to fund their European Financial Stability Fund (EFSF) and recapitalize their banks, which is being done behind the headlines. Much remains to be done, but progress in being made, though it is often too slow and small to satisfy markets. But eventually, with more structural support for their currency, better fiscal discipline, and bolder action from the European Central Bank, this important region of the global economy can avoid another “Lehman event” that would impact us all.

Please call us with any questions or concerns. Feel free to forward this to others who might be interested.

Have a great day!

Bob and the All Star Team