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Busch: Expect the Worst—German Vote=TARP Vote Part 2

Wednesday, 5 May 2010 | 11:09 AM ET

Here are the latest comments by European financial officials:

01:36 05May10 RTRS-GERMANY'S MERKEL SAYS GREEK AID PLAN IS ABOUT THE FUTURE OF EUROPE AND GERMANY IN EUROPE

01:37 05May10 RTRS-GERMANY'S MERKEL SAYS WITHOUT US THERE CAN BE NO DECISION WHICH IS ECONOMICALLY SUSTAINABLE

01:49 05May10 RTRS-GERMANY'S MERKEL SAYS AID MUST COME TO AVOID RISK OF CONTAGION

03:17 05May10 RTRS-ECB'S WEBER - GREEK DEFAULT WOULD BE SUBSTANTIAL RISK FOR THE STABILTY OF EURO ZONE, FINANCIAL SYSTEM

03:17 05May10 RTRS-ECB'S WEBER - SEE THREAT OF SERIOUS CONTAGION EFFECTS FOR OTHER EURO ZONE STATES

06:20 05May10 RTRS-GERMAN FIN MKT WATCHDOG BAFIN CHIEF SAYS SEES RISK OF SPECULATION EXTENDING TO PORTUGAL, SPAIN AND OTHERS

Last Friday, I stated that the vote this week on Friday in Germanywas analogous to what occurred in the US Congress leading up to the TARP vote. The uncertainty would drive down the Euro and raise questions over the viability of the union.

Now, we’re seeing another aspect arise: attempting to scare the German politicians into voting yes.

Who can forget the chilling testimony of Paulson and Bernanke warning of dire consequences should TARP be voted down?

Or how about President Bush going on prime time to the nation describing how serious the crisis would become if action was not taken immediately?

“The government's top economic experts warn that without immediate action by Congress, America could slip into a financial panic, and a distressing scenario would unfold: More banks could fail, including some in your community. The stock market would drop even more, which would reduce the value of your retirement account. The value of your home could plummet. Foreclosures would rise dramatically. And if you own a business or a farm, you would find it harder and more expensive to get credit. More businesses would close their doors, and millions of Americans could lose their jobs. Even if you have good credit history, it would be more difficult for you to get the loans you need to buy a car or send your children to college. And ultimately, our country could experience a long and painful recession.”

Debtor Nations
Debtor Nations

Remember, the US House still voted down the measure even after President Bush’s warning!

This is the current environment for the European markets and currency.

Politicians are making the situation worse by warning of the dire consequences of failure. The peak of this fear should coincide with the vote on Friday in the German parliament. A delay or a negative vote will strafe the European equity markets.

Recall even with the US passing TARP, the equity markets continued to decline for 6 months.

While I don’t anticipate this timeline to occur for Europe, I believe they will remain under duress until a credible plan to enforce EMU rules emerges and the ECB engages in some form of quantitative easing.

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Andrew B. BuschDirector, Global Currency and Public Policy Strategist at BMO Capital Markets, a recognized expert on the world financial markets and how these markets are impacted by political events, and a frequent CNBC contributor. You can comment on his piece and reach him hereand you can follow him on Twitter at http://twitter.com/abusch.

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