1931:Credit Anstalt 2010:Greece
May 16, 2010
Posted by Jody Eisenman | Filed under Uncategorized
There is a saying that history repeats itself. Could it be happening again? The stock and bond markets are beginning to show signs of weakness, largely driven the events in Europe. Just what exactly is happening there that is causing so much concern here?
In order to understand this, one must go back in time about 100 years. Prior to World War 1, the Austria-Hungarian Empire was considered to be perhaps the most solid economy in Europe. With the conclusion of the War in 1919, the empire split up into several countries such as Austria, Hungary and Czechoslovakia. Austria’s biggest bank at the time was called Credit Anstalt. In 1931, Credit Anstalt, which had taken it a debt laden rival bank (sound familiar?), found that it could not get out of debt as the Depression hit. As a result, the bank found it had a run on its’ hands, as everyone ran to get their money out. The run spread to Germany, which blew into a full scale bank crisis. With the German and Austrian populations fed up from the after effects of the war and harsh economic conditions, Adolf Hitler and the Nazi party rose to power, eventually plunging Europe into the World War Two. Now, what does this have to do with Greece now?
Although conditions are different due to the European Union, Greece is so severely in debt that they were forced to be bailed out by its’ fellow Union countries. The problem is, many of these countries are staring at severe debt problems themselves. As readers of this blog know, there has never been a situation where so many of the industrialized nations are running such severe debts. The Euro is collapsing, and many people feel that it is just a matter of time before this currency ceases to exist. The Rydex Euro ETF (FXE) has dropped from around 150 last December to under 124 now. The general concern is twofold:
1. Could this “contagion” spread to other European countries? If so, could the governments afford to bail them out? Could this lead to political instability?
2. Could this spread to the United States? We are heavily in debt, and its’ getting worse. A failed treasury auction or a significant rise in interest rates could lead to a massive increase in our debt load. Look what happened when all these adjustable rate mortgages reset to much higher rates. Buyers couldn’t pay, and just walked away from their homes. While the US government could not just “walk away”, this could certainly lead to some severe pain, or possibly a healthy rate of inflation.
Could the markets settle down and recover? Absolutely. However, the scenarios above are what keep a lot of bankers up at night.
May 25th, 2010 at 8:16 pm
[...] http://www.jodyeisenman.com/2010/05/1931credit-anstalt-2010greece/, there are several countries in Europe that are so heavily in debt that the IMF may be forced to do additional bailouts. Over the weekend, the Bank of Spain took over a smaller failing bank. Sound familiar? [...]
November 24th, 2010 at 7:07 pm
[...] Deck Chairs on the Titanic200 Years of Losses?The Euro zone IssueFinancial Stocks are in Free Fall1931:Credit Anstalt 2010:GreeceFrom Market Making to High Frequency Trading: A Brief History (part 3)Some Interesting TidbitsThe [...]