Saturday, October 15, 2011

the peak oil crisis: contagion

FCNP | With every passing day it is becoming more apparent that the crisis of the depletion of cheap oil has become deeply enmeshed in the European debt crises.

The sequence of events is well known. Greece's economy is imploding; the government can no longer pay its bills without continuing bailouts from the EU; at some point Greece will have to default on at least part of the $430 billion it owes to mostly European banks. Such a default would in turn do severe damage to the viability of many major European Banks which are already suffering a liquidity shortage from the slowing global economy. It is widely believed that these problems quickly would spread to Italy, Spain, Portugal, Ireland, and now Belgium which are too large to ever be bailed out by France and Germany. Credit Default Swaps would kick in and, taken to the extreme, the world could conceivably not have much of a banking system left.

What is most disconcerting is that many believe that unless all this is settled in the next few weeks, the deluge will begin. Obviously the Europeans do not want to see their financial system collapse and are scrambling to find a solution. EU leaders have given themselves a deadline of October 23rd to come up with a plan to settle the Greek debt question and then recapitalize the European banks that will have to take heavy losses on Greek and possibly other nations' sovereign debts. One of the many issues involved in this crisis, of course, is how much of these heavy losses will be absorbed by the banks making the loans, and how much will be absorbed by the taxpayers of the better-off Eurozone states. London and Washington are putting heavy pressure on the EU to settle this issue, realizing the havoc that would ensue should there be even a partial meltdown of the EU banking system.

There is a big systemic problem going on here. So long as 17 sovereign states and their parliaments have to approve major actions the likelihood that there will be quick and decisive solution to all this seems remote. As we have seen with the Greek situation over the last two years, there is very little the Eurozone as a collective can do to enforce new and highly unpopular economic and social policies on the members, short of kicking them out of the Eurozone and suffering the consequences of a hard default. Despite all the optimism in the financial press and rising equity prices, it seem that in reality there is very little the EU can do to effect a long-term solution.