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“It’s a legacy of the same crisis and issues that have never been properly resolved,” he tells BNN. “The real problem now is the amount of derivatives is even larger that are backed by banks, they are unreserved and we’re now facing problems with the credit of sovereign European countries.”
Mikhailovich says recent moves by the European Central Bank and euro zone governments to shore up the balance sheets of major financial institutions may be nothing more than a band-aid solution.
“You cannot solve a balance sheet problem by moving liabilities from one balance sheet to another. The only way to solve a problem of over-indebtedness is for someone to admit that receivables will not be paid,” he says. “We have a situation where not only did we not deal with unpayable receivables, we have piled on additional debt -- government debt -- to support economic activity and continue these bailouts and we’re essentially in a worst place then we were four years ago.”
He says it’s only a “matter of time” until those debts will have to be dealt with -- likely by writing them off.
He adds that while massive bailouts may “fuel” markets for a time, “you cannot solve a problem that arises out of the misapplication of financial engineering by piling in more financial engineering.”