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Lessons Learned from Europe's Financial Crisis

Lessons Learned from Europe’s Financial Crisis
Ron DeLegge
December 21, 2010

SAN DIEGO ( – For Europe, 2010 will end the same way it started; in financial crisis.

Despite the illustrious birth of a massive bailout fund, the long term solution to Europe’s (NYSEArca: VGK) deep financial problems has been elusive. And getting the euro-zone’s members, who speak different languages, have different philosophies and diverging opinions about money to agree on a consensus has been equally difficult.

Let’s analyze some of the key leaders behind Europe’s financial mess.

Europe’s sovereign debt crisis began in Greece so it’s only apt that we begin there.

In January 2010, the Prime Minister of Greece, George Papandreou denied that his country needed assistance to resolve its financial problems. At the World Economic Forum’s annual meeting, Papandreou said Greece didn’t asked France or Germany “for any financial help.”

Just a few months later, finance ministers from 16 countries that use the euro dollar (NYSEArca: FXE) agreed to foot a $145 billion (110 billion euro) rescue package for Greece. Papandreou’s public denials turned out to be untrue. But it doesn’t end there.

Papandreou complained Greece was somehow a victim because short-sellers had targeted his country’s faltering government bonds and banking system. Greece’s stock market regulators responded by banning the short selling of bank stocks.

Not that they have much credibility left anymore, but major credit ratings like Fitch Ratings are on the verge of downgrading Greece’s credit score again. Threats about downgrades have become so commonplace the market hardly reacts anymore. Greece’s gross domestic product is projected for a 3% decline in 2011.

No doubt Greece’s politicians still believe fiscal recklessness didn’t lead to Greece’s problems but evil short sellers were the culprits. 

Brian Lenihan, Ireland’s Minister of Finance is another case study of what’s wrong with Europe.

On multiple occasions Lenihan defended the soundness of Ireland’s (NYSEArca: EIRL) banking system. On May 6, 2010 he told the Irish Times, “The risk of contagion in my view does not extend to Ireland. Over the last 18 months we have taken many of the measures that the Greeks are only beginning to take. I don’t see Ireland as being at great risk.”

Instead of admitting to Ireland’s deep financial problems, Lenihan continued down the path denial and complacency.

On October 11, 2010 the Irish Times said Brian Lenihan was “absolutely” sure the country would not need to seek a bailout from the IMF and European Union. Later, Lenihan said Ireland was emerging from deficits with the help of stronger imports and emphasized the country was fully funded through the middle of 2011.

All along Lenihan provided a misleading assessment of Ireland’s true financial condition.

Is it any wonder the Financial Times awarded Lenihan the dubious title of being the worst finance minister among 19 euro-zone peers?

Europe’s Central Bank
Jean-Claude Trichet, president of the European Central Bank (ECB) has contributed his fair share of financial nonsense.

In January 2010 in an authoritative tone he said, “We will not change our collateral policy for the sake of any particular country.” This turned out to be a major misstatement because a few months later Trichet eliminated the eligibility rules to allow faltering Greece to swap government debt for ECB cash.

Then in March, Trichet continued his banter by saying, “I don’t trust that it would be appropriate to have the introduction of the International Monetary Fund (IMF) as a supplier of help.” This too was wrong because the IMF has played and continues to play a central role in backstopping Europe’s over indebted nations. The initial $1 trillion (750 billion euro) in bailout proceeds is probably just the beginning of what’s yet to come.

Financial Lessons Learned 
There are countless lessons to be learned from Europe’s financial crisis.

First, saddling financially strong nations like France and Germany with the debts of weaker nations undermines the fiscal muscle of the strong. Additionally, it weakens the rest of the euro-zone of which the strong are a part of. The market already sees this. Speculation that France and Germany’s stellar credit rating could be cut have already started circulate.

Second, listening to Europe’s leaders has proven to be a fruitless exercise. And the same is true of listening to analysts who take high level misinformation and convert it to rosy financial projections. 

Early on (January 2010), the ETF Profit Strategy Newsletter warned of big problems for Europe and the euro dollar. At that time, many still thought the euro was in a position to overtake the U.S. dollar as the world’s reserve currency. Then, during the euro’s summer rally while many were tricked into believing the worst was over for Europe, the newsletter stuck to its guns. Today, it’s outlined a clear profit opportunity for ETF investors to capitalize on what lies ahead.  

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