	Generational Dynamics
	Forecasting America's Destiny ... and the World's

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Generational Dynamics Web Log for 2-Dec-2010
2-Dec-10 News -- Europe tries to save itself with massive new bailout program

Web Log - December, 2010

2-Dec-10 News -- Europe tries to save itself with massive new bailout program

South Koreans puzzled why investors don't worry about war

Europe tries to save itself with massive new bailout program

In the past few days, we've described the increasing investor panic that has driven bond yields (interest rates) for several European countries to historically high levels, indicating increasing investor belief that those countries are going to reach financial default. High yields mean that countries that borrow money have to pay very high interest rates.

It's not just countries that are affected. European corporations that wish to borrow money by issuing bonds are even worse off, according to the Financial Times (Access).

"Borrowing costs for most companies and banks in Europe have jumped but issuers from countries on the eurozone’s periphery have suffered most," according to the article. "Analysts and bankers said that, in effect, bond markets had mostly shut for these issuers."

Bond yields improved slightly on Wednesday on the rumor that the European Central Bank (ECB) was going to propose a massive new bailout program on Thursday, on the order of 1-2 trillion euros. Under the proposal, the ECB would purchase the country bonds and possibly also the corporate bonds at lower-than-market interest rates, effectively transferring the debt risk from the individual countries and corporations to the European Union itself.

It's not at all certain that the proposal will be accepted. Similar programs by the American Federal Reserve bank could be enacted with much less difficulty because of the highly centralized American government. But the European Union is still a loosely confederated group of countries.

"The knives are out," says a Euro Intelligence analysis, which says that Spain is accusing Germany and France for destabilizing the euro, and Ireland is blaming the ECB for pushing Ireland into an unnecessarily unfavorable bailout situation. As for the rumored ECB bond purchase program,

"Germany would go ballistic. Considering Axel Weber’s publically announced opposition to the puny bond purchase programme, which so far added up to a mere €60bn, it is hard to predict how Germany would react to a breach of European law, not to speak of German constitutional law. The loss of confidence in the euro and its institutions would be complete. This is another of those brilliant 'solutions' that backfire within a short time after their announcements."

However, Europe is running out of time, according to a Reuters analysis. According to one analyst, "The politicians in Europe as a group, and perhaps an orchestrated group, keep putting out the message that everything is fine when it is obviously not. There reaches a point, which arrived [on Tuesday] in my opinion, when the investment community's faith was breached one too many times and now people are fleeing the scene."

South Koreans puzzled why investors don't worry about war

An interesting article in the Korea Times asks why the KOSPI index of South Korean stocks is doing so well, even though North Korea is threatening war:

"Moral hazard of market analysts on North Korean threat possible
An ominous indifference is spreading in the financial market toward the military conflict with North Korea.
Some think that there is widespread public apathy toward security, particularly the risk of Korean War II, just like the American investors had been complacent before the bubbly subprime mortgage market.
Since Tuesday [November 23], stock prices have fallen, but the movement was so marginal that it is difficult to believe the escalating military tension out on Yeonpyeong Island had particularly any impact on the market. ...
People in the stock and bond market think that they have learned enough from previous experience that there will never be a full-scale war on the Korean peninsula. But this complacency can be dangerous, says a high-ranking official at the Ministry of Strategy and Finance.
“It seems that the people in the financial market are thinking (North Korea) is crying wolf,” he told The Korea Times on Friday. “That raises worries about what will happen to the market if the wolves really come down, though, of course, that should not happen in reality.”"

An important concept underlying Generational Dynamics is that younger generations ignore dangers that they're too young to have experienced in the past. Thus, they believe "that there will never be a full-scale war on the Korean peninsula."

Quite the opposite appears to be true. North Korea has been speeding up and escalating its provocations, several of which are explicit acts of war. North Korea is an increasingly desperate starving nation, and the evidence appears to indicate that the North Koreans want to provoke a war. One of these days, they'll succeed.

(Comments: For reader comments, questions and discussion, see the 2-Dec-10 News -- Europe tries to save itself with massive new bailout program thread of the Generational Dynamics forum. Comments may be posted anonymously.) (2-Dec-2010) Permanent Link
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Generational Dynamics Web Log for 2-Dec-2010 2-Dec-10 News -- Europe tries to save itself with massive new bailout program

Europe tries to save itself with massive new bailout program

South Koreans puzzled why investors don't worry about war

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Generational Dynamics Web Log for 2-Dec-2010
2-Dec-10 News -- Europe tries to save itself with massive new bailout program