The biggest – and most consistent criticism that my last post received is that the national champions in Europe (particularly the Netherlands) are in deep trouble.
I was very careful describing how HSBC Hong Kong should be capitalised (separately and with very large – even 100% - capital charges for cross border funding). If this had been done in the Netherlands there would be no trouble. Even the Icelandic banks would have survived in Iceland - though their UK subsidiaries would be worm food.
The problem is that cross border funding by leveraged institutions is dangerous. It almost caused Citibank to fail in the early 1990s. It was a key part of the bank collapse in Korea. In this cycle it was key in the Dutch banks, in Sweden as I wrote about here. It was also key in Norway and Sweden during their famous bank collapse (here).
Monetary union and currency zones are famously dangerous for banks.
But more to the point - banks intermediate current account deficits - and that can make country problems contagious.
This leads to a question on which I express only a weak view. In some sense the issue in America this time is also monetary union. Because of the peg there is a sort of monetary union between China and the United States. It was the supply of Chinese savings that – as much as anything – powered this boom.
My question? Is there a safe way of recycling all of those offshore dollars held in China and oil exporting countries? If there is not then the value of having the reserve currency is massively overstated.