Let’s take a quick look at Brexit-related news this week. Think in terms of contagion. We are at the beginning of the Brexit-related issues and not the end. My personal view is that the single largest systemic risk we face is a sovereign debt crisis stemming from Europe. But it could come from China or Japan or the EM. Debt is the common denominator. The globe is facing a long-term debt deleveraging cycle few of us alive have witnessed.
The debt problems are above the 90% debt-to-GDP level in most of the developed world. We’ll get through this somehow, but as Yoda might say, “think differently we must.”
I read Art Cashin’s piece every morning. I love Art and his humble and direct way. The following is from his post on Friday:
“Could The Brexit Implementation Turn European Banks Into Tumbling Dominoes? – That’s a question that some very bright people are beginning to ask.
My eagle-eyed friend, Chris Whalen, and some of his savvy pals at Kroll Bond Rating Agency (KBRA) have put out an eye-opening discussion of the question in a new piece titled: “Italy Slowly Moves Toward Comprehensive Bank Rescue”.
Here’s their summary of the report:
- For the past several years, the European Central Bank (ECB) under Governor Mario Draghi has carried the world of banking in the European Union on its shoulders. Kroll Bond Rating Agency (KBRA) believes that the political shock of the vote in the UK has forced the EU to begin moving towards some type of direct aid for banks, but there remains enormous opposition from some EU member states.
- KBRA believes that the core nations of the EU led by Germany must quickly put aside their reluctance to commit resources to support a comprehensive bailout of Italy’s banking sector. Just as the U.S. learned through bitter experience in the S&L crisis of the 1980s that delaying the clean-up of troubled banks greatly increased the ultimate cost of resolution, the EU’s political leaders seem unwilling to take the painful steps needed to avoid financial contagion.
- One way or another, KBRA believes that the EU must collectively face the problem of bank solvency. By delaying the inevitable process of restructuring, the EU runs the risk of a “surprise” to the financial markets that could quickly metastasize into a larger political crisis. Indeed, precisely that scenario seems to be unfolding in the EU today.
Chris and his friends warn that the EU cannot afford to wait until Brexit is actually set in motion but must begin soon to avoid the domino effect from beginning. Therefore, we should see action very soon, if Europe is going to address the banking problem in time.”
The current opinions and forecasts expressed herein are solely those of Steve Blumenthal and are subject to change. They do not represent the opinions of CMG. CMGs trading strategies are quantitative and may hold a position that at any given time does not reflect Steve’s forecasts. Steve’s opinions and forecasts may not actually come to pass. Information on this site should not be used as a recommendation to buy or sell any investment product or strategy.