Friday, October 7, 2011
Greenspan: Idea U.S. Banks Are Not Exposed to Troubled Euroepan Banks "An Inappropriate View"
"You can't understand the United States at all unless you understand what's going in Europe," Greenspan stated in an interview on CNBC's Squawk Box October 7, 2011.
"I think we have been through a remarkably elaborate program to try to find out whether the single currencies work," he said. Like others, Greenspan thought it would work in the beginning because the markets bought into the idea it would work. This could be seen in the pricing of the currencies in countries like Greece, Italy, Spain and Portugal as they moved toward currency union. As the date of currency union approached in each country, the spread in interest rates of local currencies above the German bund would narrow dramatically from a level of a hundreds of basis points.
"I said and thought the markets are assuming that the Greeks and the Italians and the Spaniards and Portuguese are going to behave like Germans, and that's what [the markets] were telling us," Greenspan said. "They were going to capture the basic culture of Germany of prudence and savings." Thus, Greenspan said, this is how he was persuaded by the markets.But, in fact, history has shown the opposite of what the markets were predicting. "I was wrong," he concluded.
"Does the Euro hold together?" he asked rhetorically. "Starting from scratch [Europe] would have been better off having a Euro-zone which included obviously Germany, Austria, Luxembourg, Finland, Netherlands," Greenspan said. "Obviously, that would have worked," Greenspan said. "In a sense that there is a common culture that goes across that part of Europe, and you can see it when you go from one place to the other."
Greenspan also raised the issue of how much exposure U.S. banks have to European banks. "Many U.S. banks say that they don't have exposure or that they hedged their exposure. Do you believe them?" Greenspan asked. "It's not a direct exposure. Look at their balance sheets, you can't find it. But we're dealing with a global market, and the notion that we are completely isolated is, I think, a very dangerous -- that's too strong a word -- it's an inappropriate view [given] the integration of these systems," he added.
"The presumption that somehow the huge American banking system or financial system is independent of Europe, I think, is just utterly unrealistic," Greenspan said. "It looks independent until it isn't."
Greenspan questioned whether enough has been done in Europe to address the crisis before it gets worse, pointing out that 2,000 basis points for interest rates in Greece above the German bund are not sustainable. There is no credible scenario of which I'm aware in which they can get by without very significant cuts in their sovereign debt."
No one in Europe is taking the kind of pro-active steps to get ahead of the inevitable crisis, according to Greenspan. "It's going to take time. We know that there is a 2,000 basis point spread. But no one's rushing over there to do anything immediately," he said. He points that in the United States, former Treasury Secretary Hank Paulson, if the same problem were facing America, "would do something or we would probably face that head on immediately because it's going to get worse if you don't," Greenspan said.
"But now, this is kind of the European way. They're going to let the banks sort of maybe recapitalize in the meantime and take their time," he said. "Suddenly, we have three up days in the dow. We're okay with the track that they're on, No? No."
The Dow is seeing equity premiums at 1930s levels, even though productivity is improving and earnings of non-financials moving higher, Greenspan pointed out. This indicates a level of worry in the U.S. stock market above and beyond the fundamentals of the American economy.