"(T)o say that the individual is culturally constituted has become a truism. . . . We assume, almost without question, that a self belongs to a specific cultural world much as it speaks a native language." James Clifford
Showing posts with label state government debt. Show all posts
Showing posts with label state government debt. Show all posts

Friday, January 23, 2015

Deficiencies in the E.U. Capital Markets: A Silver Lining

With the IMF reducing its forecast of E.U.[1] economic growth for 2015 by 0.2% to 1.2 percent, E.C.B. officials still intent to go ahead with the much-anticipated “quantitative easing” program (i.e., buying state bonds), and, the euro having recently fallen 12% against the U.S. dollar since peaking, and crude oil prices below $60 a barrel in January, the limited scale of the E.U.’s capital markets relative to their American counterparts exacerbated the E.U.’s blight. Most directly, the lack of diversification on the types of capital markets meant that the focus on the bonds issued by state governments would continue.[2] With an upcoming election in the state of Greece making stock markets jittery due to the risk that the state might default on its bonds, the precarious condition of a relatively undiversified capital market added, albeit subtly, to the sense of risk in the air. Having had years to develop alternative markets since the financial crisis, E.U. policy makers had no one to blame but themselves—it would seem. However, a bright spot in European culture or society may be responsible for the lack of development.

The size of the corporate bond market was at the time just 34% of the American counterpart as a proportion of GDP, according to New Financial, a think tank in London.[3] The E.U.’s leveraged loan and securitization markets were 19% and 17% the size of their U.S. counterparts, and the venture capital market was just 15 percent, again all in terms relative to GDP.[4] Because the respective U.S. counterparts dwarf the E.U. markets by such an amazing extent in terms of GDP, part of the explanation may involve different business cultures with respect to debt.

With the U.S. federal debt at nearly $18 trillion and the previous year still showing a deficit of over $400 billion, and almost a third of student loans in default, it is easy to view Europeans as relatively debt-averse even if the post-financial-crisis years of debt-weary states (i.e, the “PIGS”) present an image to the contrary. I suspect that the relative skepticism on debt is in turn a manifestation of European society being less infatuated with business and thus less reflective of its culture. Put another way, the positive connotation that leverage (i.e., using borrowing in productive investment to hopefully capture more of the returns than is possible in the case of stock-issuance capital financing) has in the business world has been more salient in American society than in its European counterpart. Considering the misuse of debt-financing in the American and European housing markets that led to the financial crisis in 2008, the relative size of the European capital markets as of 2015 has a silver lining.



[1] Specifically, for the part of the E.U. that uses the euro currency.
[2] Simon Nixon, “A Continent in Need of Greater Capital Markets,” The Wall Street Journal, January 20, 2015.
[3] Ibid.
[4] Ibid.

Sunday, January 30, 2011

Amid Record Bonuses Goldman Sachs Enabled Greek Debt

The person who has the gold makes the rules.  I suspect this is the operating mantra at Goldman Sachs even after the bank’s near-death experience (when Solomon Bros stock was taking a hit, Blankfein knew his bank could be next).  As it turns out, the bank was involved in enabling Greece to stealthily spend beyond its means. Just after Greece had been admitted to Europe’s monetary union, Goldman helped the government quietly borrow billions, people familiar with the transaction said. That deal, hidden from public view because it was treated as a currency trade rather than a loan, helped Athens to meet Europe’s deficit rules while continuing to spend beyond its means. Additionally, in late November, 2009— three months before Athens became the epicenter of global financial anxiety — a team from Goldman Sachs arrived in Athens with a very modern proposition for a government struggling to pay its bills, according to two people who were briefed on the meeting. The bankers, led by Goldman’s president, Gary D. Cohn, held out a financing instrument that would have pushed debt from Greece’s health care system far into the future, much as when strapped homeowners take out second mortgages to pay off their credit cards.[1]


The full essay is in Cases of Unethical Business, available in print and as an ebook at Amazon.com.  


1. Louise Story, Landon Thomas, Jr., and Nelson D. Schartz, “Wall St. Helped to Mask Debt Fueling Europe’s Crisis,” The New York Times, February 13, 2010.