Greece Crisis Turns 2

This week’s economic indicators, Greece and Europe, and low-rate creativity have several implications for credit unions.

 
 

Let’s all wish Greece Happy Anniversary today. This might not actually be the day, but it was roughly two years ago that the Greece debt crisis first emerged. After a new government exposed the previous government’s sleight of hand on reporting the budget deficit, Greek bonds came under pressure with the Greek 10-year note quickly moving from 4% to almost 9%. After some promises of action from Greece, vows of support from other European Union members, and loans to Greek banks, the fast money crowd (including European banks) swooped in to gobble up the cheap debt and rates fell for a brief period of time. Now, of course, those private bondholders left holding the bag are trying to squeeze out a few pennies in salvage value.

The debts of Italy and Spain are currently enjoying a recovery similar to Greece’s recovery two years ago and for the same reasons — promises of action and liquidity injections. The first round of the European Central Bank’s three-year money loans assuaged bank liquidity concerns, but banks used many of the billions to buy sovereign debt. In late February the ECB will offer a second round of liquidity funds, and the emboldened bankers are salivating to take on even more low-cost funds to buy sovereign debt. This is nothing more than a cycle of insanity. Banks are buying what got them into trouble in the first place, and the ECB is giving the banks more funds to do the same things. This is not a solution; this is a recipe for a disaster. Debt upon debt upon debt.  

Why We Should Care

Like a lot of Americans, I’m tired of hearing about Europe’s debt woes. A lot of us wonder why we should care. That is probably what most European’s were thinking back in early 2008. “Why do we care what these silly Americans are doing with mortgages?” (Please read with appropriate accent).

Our banks have less direct exposure to European sovereign debt than the European banks did to our mortgage debt. But our banks are connected in many other ways to European banks. Our banks are also lending more directly to European companies. This is a big deal. A weaker Europe will matter here.

Do Low Interest Rates Mean The End Of CDs For Members?

I am a fan of neither the Fed’s recently revealed interest rate forecast nor the way it was produced. But, the forecast will probably be correct. The long siege of low rates has years to run for both global and domestic policy reasons. A recent article on bankrate.com cited recent Federal Reserve statistics that showed CDs are at the lowest level in three decades. CDs were once a great way for credit unions to compete and keep members connected for a long period of time. Look at your own CD book. Is it dwindling? Are you at risk of boring your members? It’s time to get creative in keeping your members connected. It’s not going to happen on rates any longer.

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Feb. 1, 2012


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