Below is another missive from Minyan Peter, who has become quite popular around the 'Ville with readers and professors alike since his first letter, A Bird's-Eye View of the Credit Conundrum and Brave New World for Debt Issuers.


While I know everyone’s attention is on the U.S. equity market this morning, I wanted to revisit why I put so much emphasis on the European credit markets. Let me summarize why.

First, as the rest of the market is quickly discovering, the European banks have been the major liquidity providers to the asset-backed commercial paper market. Those banks’ ability to meet their liquidity obligations to refund maturing paper is a clear sign as to whether this cycle can wind down in an orderly fashion, or whether there will be a panic. But to be clear, we are in wind down mode, and one that will take years.

Second, there has been a significant debate among financial pundits around the ability of the rest of the world to “decouple” from the U.S. consumer debt issues. (That is to say, the rest of the world will continue to motor along just fine, even though the U.S. is in an economic slowdown.) Economic prosperity requires a strong financial services sector. You can’t grow an economy if banks are unwilling (or unable) to lend money.

If the European banks become preoccupied with the fall out from their U.S. credit exposures, it will more than likely reduce their ability to lend into their domestic markets. (And we are already seeing concern about this being voiced by the ECB.) Without liquidity, their domestic market growth will slow down..

Third, the Spanish housing market is already in a significant decline and you are beginning to see commentary regarding a possible (and I believe real) U.K. housing bubble. Housing markets matter, and again, this may further draw capital away from economic expansion.

Finally, without economic strength in the United States and, I believe increasingly likely in Europe, the looming question becomes Asia.

As Prof. Bennet has already highlighted repeatedly, the Chinese stock market is in bubble territory and the unpinning of substantially all of the domestic economic growth in Asia in this cycle has been in support of their export economies. Many have suggested that Asia can withstand a decline in U.S. consumer spending. The bigger question to me is whether Asia can withstand the one-two punch of a U.S. and a European slowdown.

For these reasons, Europe matters. As goes Europe so goes the world.

-Minyan Peter