Delevering in Europe Remains a Threat to World Economy

Fight disinformation: Sign up for the free Mother Jones Daily newsletter and follow the news that matters.

Among the several ways that recession in Europe could hurt the global economy is via the specter of bank deleveraging. As you may recall, one of the proximate causes of the Great Panic of 2008 was the fact that American banks had run up huge amounts of leverage, something that makes the banking system extremely vulnerable to sudden shocks — like, say, a housing bubble bursting.

Well, European banks were even more leveraged than American banks. The top chart on the right, courtesy of a new IMF report, shows that American bank leverage peaked in 2008 at a ratio of about 25:1, and since then has dropped to a much more sustainable 15:1. European banks, even after four years of deleveraging, are still at 25:1. This means they remain vulnerable to sudden shocks — like, say, Spain going bust — so they’ll need to continue deleveraging for several more years.

There are basically two ways they can do this. First, they can raise money by selling off assets. This is OK unless it turns into a fire sale, which is always a possibility. Second, they can reduce the amount of credit they make available. The bottom chart on the right shows the IMF’s estimate of credit contraction over the next couple of years.

The good news for Americans is that this probably won’t affect us directly very much: Most of the credit contraction will happen in Europe, and American corporations have deep access to capital markets to replace whatever they lose from European banks. There is, however, a potential indirect effect via derivative exposure, and also some more general exposure at a macro level if bank deleveraging keeps Europe’s economy in a rut.

Still, the IMF doesn’t think the credit contraction in Europe is likely to be all that severe: “The implied decline in the credit-to-GDP ratio [] sits between the relatively moderate experience in Japan in the 1990s and the more pronounced credit contraction in the United States in the earlier part of the financial crisis.” As long as European banks avoid a “synchronised and large-scale deleveraging” — i.e., a fire sale of assets — things will likely stay under control.

In other words, the big danger remains not sluggish growth in Europe, which everyone has already priced in, but the possibility of panic. And with sovereign debt still extremely wobbly in the south, monetary policy still too tight, austerity still the order of the day, and bank leverage still high — with all that still in front of us, panic remains a distinct option. A eurozone crackup is still a real possibility.

WHO DOESN’T LOVE A POSITIVE STORY—OR TWO?

“Great journalism really does make a difference in this world: it can even save kids.”

That’s what a civil rights lawyer wrote to Julia Lurie, the day after her major investigation into a psychiatric hospital chain that uses foster children as “cash cows” published, letting her know he was using her findings that same day in a hearing to keep a child out of one of the facilities we investigated.

That’s awesome. As is the fact that Julia, who spent a full year reporting this challenging story, promptly heard from a Senate committee that will use her work in their own investigation of Universal Health Services. There’s no doubt her revelations will continue to have a big impact in the months and years to come.

Like another story about Mother Jones’ real-world impact.

This one, a multiyear investigation, published in 2021, exposed conditions in sugar work camps in the Dominican Republic owned by Central Romana—the conglomerate behind brands like C&H and Domino, whose product ends up in our Hershey bars and other sweets. A year ago, the Biden administration banned sugar imports from Central Romana. And just recently, we learned of a previously undisclosed investigation from the Department of Homeland Security, looking into working conditions at Central Romana. How big of a deal is this?

“This could be the first time a corporation would be held criminally liable for forced labor in their own supply chains,” according to a retired special agent we talked to.

Wow.

And it is only because Mother Jones is funded primarily by donations from readers that we can mount ambitious, yearlong—or more—investigations like these two stories that are making waves.

About that: It’s unfathomably hard in the news business right now, and we came up about $28,000 short during our recent fall fundraising campaign. We simply have to make that up soon to avoid falling further behind than can be made up for, or needing to somehow trim $1 million from our budget, like happened last year.

If you can, please support the reporting you get from Mother Jones—that exists to make a difference, not a profit—with a donation of any amount today. We need more donations than normal to come in from this specific blurb to help close our funding gap before it gets any bigger.

payment methods

WHO DOESN’T LOVE A POSITIVE STORY—OR TWO?

“Great journalism really does make a difference in this world: it can even save kids.”

That’s what a civil rights lawyer wrote to Julia Lurie, the day after her major investigation into a psychiatric hospital chain that uses foster children as “cash cows” published, letting her know he was using her findings that same day in a hearing to keep a child out of one of the facilities we investigated.

That’s awesome. As is the fact that Julia, who spent a full year reporting this challenging story, promptly heard from a Senate committee that will use her work in their own investigation of Universal Health Services. There’s no doubt her revelations will continue to have a big impact in the months and years to come.

Like another story about Mother Jones’ real-world impact.

This one, a multiyear investigation, published in 2021, exposed conditions in sugar work camps in the Dominican Republic owned by Central Romana—the conglomerate behind brands like C&H and Domino, whose product ends up in our Hershey bars and other sweets. A year ago, the Biden administration banned sugar imports from Central Romana. And just recently, we learned of a previously undisclosed investigation from the Department of Homeland Security, looking into working conditions at Central Romana. How big of a deal is this?

“This could be the first time a corporation would be held criminally liable for forced labor in their own supply chains,” according to a retired special agent we talked to.

Wow.

And it is only because Mother Jones is funded primarily by donations from readers that we can mount ambitious, yearlong—or more—investigations like these two stories that are making waves.

About that: It’s unfathomably hard in the news business right now, and we came up about $28,000 short during our recent fall fundraising campaign. We simply have to make that up soon to avoid falling further behind than can be made up for, or needing to somehow trim $1 million from our budget, like happened last year.

If you can, please support the reporting you get from Mother Jones—that exists to make a difference, not a profit—with a donation of any amount today. We need more donations than normal to come in from this specific blurb to help close our funding gap before it gets any bigger.

payment methods

We Recommend

Latest

Sign up for our free newsletter

Subscribe to the Mother Jones Daily to have our top stories delivered directly to your inbox.

Get our award-winning magazine

Save big on a full year of investigations, ideas, and insights.

Subscribe

Support our journalism

Help Mother Jones' reporters dig deep with a tax-deductible donation.

Donate