I think there is a basic asymmetry in US and EU bank debts, which is having an effect on US/Eu relations.
EU banks own/are exposed to large losses on bad debts in US real estate. Both residential and commercial. Banks such as Deutsche Bank, Soc Gen and RBS to name just a few obviousl ones. But US banks don’t own many bad European property debts. And they don’t appear to be nearly as badly exposed to EU sovereign debt as European banks.
On the surface you would conclude that US banks are therefore better off than EU banks. We are exposed to their debt and ours. They are exposed only to their own. It may even be that US banks are net short EU sovereign debt and would make a tidy profit form any default. I don’t know this. I am just specualting.
But this asymmetry in debt creates a festering political tension. You see when the US bails out its banks, buying up worthless Mortgage Backed Securities, they find themselves bailing out not only their own banks but European ones as well. They are exposed to losses from the same MBS – both Residential (RMBS) and Commercial (CMBS). There is no easy way to suport securities tendered by US banks but not the exact same securities tendered by non-US banks. And so, many billions may have already gone to EU banks.. Particularly via AIG.
So the US government thinks to itself – ‘We helped them with our bail out. And will, whether we like it or not, with any future bail out.’ You can’t ‘help’ one mortgage but not another. Imagine helping one mortgage on a street because it was held by a US bank, but a neighbor goes to the wall because the loan was owned by Deutsche Bank. Not an easy one to explain let alone do.
Now, however, the Europeans have broken away from the US/UK policy of borrow and print for endless bail-out and stimulus measures. The stimulus measures particularly are what the US want and are peeved they are not going to get. And should any European bank default and set off a market panic the US will feel very much that they do everything they can to prevent sich a thing, at great cost to themselves, while we sit back and let it happen.
From a US point of view it seems grossly unfair and lop-sided. They bail out our banks debts. We do not help their banks and EVEN seem to leave it to the US to put up the cash for any future bail out.
Now I don’t subscribe to this logic but I think it may be a logic that has currency in the US. If I’m correct in this, then this asymmetry will be feeding an anti-european sentiment in Washington and Wall Street that will be easy to play to the US public.
So why don’t I subscribe to this way of seeing things?
Well if the US wants to bail out its banks and go down the ‘print/borrow and bail’ policy route that is up to the US government. That decision has zero bearing on what Europe decides it wants to do. Europe is not bound to ‘play its part’ in a policy dictated by Washington. If Europe has a differnt policy, then Europe has a different policy. It is not unfair, or ungratefull or anything else. It is a sovereign decision. No one is saying to Washington they have to do their part in a European ddecided policy. So in political terms it is even and fair.
BUT it does create this asymmetry financially, which makes the US policy more difficult, more exposed to failure, more expensive and does make it lop-sided. I think this financial assymetry will increase political tensions as time goes by. Especially if, as I expect, the US has to face some truely huge bail-outs again in the autumn.
Even if Europe also goes for the insane and traitorous ‘steal for the poor to protect the rich’ policy of bailing out its banks, -funneling the money to the insolvent banks via another ‘sovereign’ rescue plan – this will still leave the US feeling agrieved and somehow cheated. What the US wants and will push for, harder and harder, is a tax-payer-debt funded stimulus package to encourage consumption.
Tensions between Europe and the US could deteriorate as they did when Bush advocated boycotting France over its ‘failure’ to support the US in Iraq. Remember how “French Fries’ were replaced by “Patriot Fries or some such. And remember how France became Old Europe – a europe of cowards. Europe felt then, how thin and false any professed US bonds of friendship were for Europe.
I think these tensions will multiply, compliacte and get worse before the year’s end.