The run begins on Europe

Moody’ issued a warning on European banks, which implies that the smart money is moving out of the worst affected banks: Eastern European banks, and Western European banks with a lot of exposure to Eastern Europe.This, in turn, is putting pressure on European government bonds, as speculators doubt that European governments will be able to bail out their banks, or will go broke attempting to do so – the most fragile European regimes are facing increasing reluctance to buy their bonds, resulting in higher interest rates. A couple of days ago, the leaders of Europe met to solve the crisis, and issued a communique full of good intentions. I interpret this communique as saying that they intend to keep on doing all the disastrous bad things that led to this crisis, only even more so:

Leaders from eight European countries called for regulating financial markets and hedge funds, investment funds that typically lead to aggressive financial strategies.

German Chancellor Angela Merkel, who hosted the summit, said all financial markets, products and participants that pose a major risk must be regulated.

Ms. Merkel also called for world economies to coordinate in establishing sanctions for tax shelters and regions where financial deals are opaque.

And calling for someone else to clean up the resulting mess:

“We decided that the international institutions should have at least $500 billion to enable them not just to deal with crises, but to enable them to be able to prevent crises,” said Gordon Brown. “We have also decided we want to see a greater role for the World Bank in helping the poorest countries of the world.”

Bond markets are still giving rather low probability for the chance of a governmental financial collapse.  I find these low rates surprising.   At present you can buy insurance that a European government will pay its bills over the next five years at about one fortieth the face value of the bill, which seems mighty cheap – unless of course one suspects that if governments are not paying, neither will the insurer, in which case it is mighty expensive.