Europe is facing a run on its banking system, says Warren Buffett. The sector faces “a loss of confidence” that “won’t be easy” to repair. The octogenarian investor told CNBC that Europe’s “fundamental flaw… is that they can’t print money”.
Buffett contrasts the current situation in Europe with America’s reaction to the collapse of Lehman Brothers in 2008. “It took the full power of the United States and very strong action [to restore confidence]. The belief that the authorities would do whatever it took.” The problem with Europe, says Buffett, is that “it’s not clear who can say we’ll do whatever it takes and if they have the ability… They need the will and the ability.”
Moreover, Buffett, whose excellent investing track record has earned him the nickname the ‘Sage of Omaha’, thinks that Europe’s banks are in a worse position than America’s were in 2008. “They depend more on wholesale funding than on deposits compared to American banks. They’re larger relative to their economies than most of the US banks.” (Our own James Ferguson made the same point in a recent issue of MoneyWeek magazine: Which European banks are safe?
However, despite his short-term worries, Buffett thinks Europe will come good eventually. “Europe is not going go away. Ten years from now, we will be selling more goods to Europe and buying more goods from Europe and they will have more GDP per capita. But getting from here to there may be a problem.”
Buffett, who recently invested $10bn in tech giant IBM, is bullish on the prospects for the US economy. He claims that his investment company Berkshire Hathaway has seen growth across most business sectors. “We really have a cross-section of American business. Of the 70-plus businesses, all but about five are doing considerably better than was the case a year ago and two years ago. They have been in a steady recovery.”
The only underperforming area, says Buffett, is housing. “Anything connected with residential construction is in a depression.”