Nikolaus Piper: The view from Eruope

The Global Credit Crisis: How Bad Will it Get? April 14, 2008

Nikolaus Piper - New York Correspondent, Süddeutche Zeitung

Anti-Americanists always find some argument, even when a crane collapses in Manhattan, somebody writes on the internet, "It's the end of the American dream." Having said that, I would say it's easier to fight anti-Americanism if the Americans get some things fixed at home. And of course, there is a case for regulatory reform, and of course there are some bad practices in American finance. I would say a mortgage loan, no down payment, no interest rate, no interest payment in the first year, no documentation-that's a recipe for disaster. I think that's fraught in itself, so something has to be done there.

My second point is, Does the crisis in America have an impact on the European financial industry? The answer is, yes, of course. It's a huge impact. The best example is the Landesbank. I don't know if everybody in this room is familiar with the system of Landesbank. They came out of a very protected way. They were guaranteed by the state, they had triple-A by definition; then there were-then the European Commission stopped that, it was a good decision-but in a way they are still in this mood. We have a triple-A rate and we can play the game a little bit, and all the supervisors, the politicians, they were very happy that the smart guys and their conduits in their trading rooms, they made these huge profits with subprime loans which I didn't understand. And they have a terrible corporate culture and they have no risk management. I think risk management is even worse than that of Merrill Lynch, so something has to happen. And I think there has to be a big reform of the Landesbank system.

You mentioned the prime minister of Saxony. He resigned and we will have in Bavaria, we'll have a big issue. The Landesbank of Bavaria, I think, it's not as bad as in Saxony but nearly as bad, and there's also bad supervision by the government of Bavaria. So we will see something of that. The problem is the federal government cannot do anything about it. It's a question of the state governments and they have a record of not fixing problems. My third point is, Will it have an impact on the European economy, on the real economy? I would say yes, but it's a limited impact. We have, on that point, I'm more with Adam Posen than with Nouriel. The IMF at the moment, is very, very pessimistic, surprisingly pessimistic. Buy even the EIMF does not predict a recession for Europe. Yes, we have housing bust in Ireland, in Spain, in the U.K., but we don't have a housing bust in Germany and France. We never had a bubble so we don't have a bust. And I think we will have-the important point here is to make this difference. Yes, the financial industry is heavily hit, but it's not the real economy, and the real issue is, and I agree with Michael on that point, that we will have inflation and the inflation issue is the most prominent for the time being, so [Unintelligible] not lower the interest rates that we have an expansive, the high Euro and the weak dollar for the time being.