Dimon Sees Progress in Europe as Buffett Warns of ‘Fatal Flaw’

JPMorgan Chase & Co. (JPM) Chief Executive Officer Jamie Dimon told analysts Europe is moving toward solving its financial crisis, while billionaire Warren Buffett said the region’s common currency is doomed to fail without an overhaul in how it works.

“You see progress, you know, two steps forward, one step back,” Dimon said today in a meeting in New York. Buffett, speaking contemporaneously in a Bloomberg Television interview from Sun Valley, Idaho, said European leaders face “major problems” and the 17-country euro area may not survive.

The two executives, who have publicly expressed esteem for one another, are each bracing for further turmoil as borrowing costs rise in southern Europe. While Dimon affirmed his commitment to Spain and Italy, he said he cut JPMorgan’s peripheral European net exposure by half to about $6 billion. Buffett, CEO of Berkshire Hathaway Inc. (BRK/A), has his European portfolio in the AAA rated economies of Germany, the U.K. and the Netherlands.

“The system that they put in place had a fundamental fatal flaw,” Buffett said of the euro on “In the Loop With Betty Liu.” Lacking a common fiscal policy, “it can’t survive with the present rules. That’s what they’re learning. The question is, can 17 countries get together in a way to essentially re-do something.”

Italy’s 10-year bond yields 6.06 percent, 4.8 percentage points more than the equivalent German bund. Italy, the euro- area’s third-biggest economy behind Germany and France, was downgraded two levels today by Moody’s Investors Service.

European Bailouts

European leaders are deepening their ties in response to the sovereign debt crisis by collaborating on bailouts and insisting on budget-deficit curbs. The euro was started by 11 countries, led by Germany, in January 1999.

Over the past two years, the union has offered rescues to Greece, Ireland, Portugal, Spain and Cyprus.

“We’ve kind of had a roller coaster ride here,” said Dimon, who addressed the analysts to discuss New York-based JPMorgan’s second-quarter results. “We still think they’re going to muddle through, but it may not be in the form or fashion or the timetable we would prefer.”

Berkshire sold its French, Spanish and Italian bonds two years ago, Buffett told CNBC yesterday. The Omaha, Nebraska- based firm had about 80 percent of its $11 billion in non-U.S. government-related debt from Germany, the U.K., Canada, Australia and the Netherlands, as of March 31, according to regulatory filings. Buffett told CNBC that in a decade Europe will have resolved its debt crisis and be “working fine.”

Dimon said JPMorgan’s losses in extreme scenarios, such as a break-up of the European Union, could exceed $3 billion. The bank continues to do business in Italy and Spain and has been hedging more of its exposure there, he said.

JPMorgan’s second-quarter profit fell 9 percent to $4.96 billion from a year earlier, as the company booked a $4.4 billion trading loss at its chief investment office.

To contact the reporters on this story: Andrew Frye in Rome at afrye@bloomberg.net; Noah Buhayar in New York at nbuhayar@bloomberg.net

To contact the editors responsible for this story: James Hertling at jhertling@bloomberg.net; Dan Kraut at dkraut2@bloomberg.net

Bloomberg reserves the right to remove comments but is under no obligation to do so, or to explain individual moderation decisions.

Please enable JavaScript to view the comments powered by Disqus.