"If euro fails then Europe fails" - Angela Merkel

[dandelion]

You dont think that there might just be a nosedive in sterling as all bank deposits which people (and companies) want in euros get converted back? There would be a total run on all the banks as people ran to get sterling cash in their hands which at least could not be swapped into Irish scrip instantly. Fundamentally, how is Ireland better off using Uk currency than euros? That little difficulty still doesnt make any sense.

 

[Jason]

Fundamentally, how is Ireland better off using Uk currency than euros? That little difficulty still doesnt make any sense.

Easy!

They default. They write off their debts. They just refuse to pay. Suddenly they have no debts. Life is wonderful. Of course they would be kicked out of the euro. In the medium term they need their own currency. But there are logistic problems with creating the banknotes overnight, and anyway the unbacked currency would sink like a stone. But it is comparatively simple to use an established currency for a while, then float your own through fixed peg and floating peg.

Impact on sterling would need a lot of working out.

 

[dandelion]

But they are using an established currency already....

Impact on sterling would need a lot of working out.

..........!

 

[B_nyvin]

EU nations just writing off debt would be pretty crazy. EU is pretty self-absorbed with itself with finances....you get deposits from Germans, French, and Scandinavians and then lend out to the Mediterranean and "the Isles".

Ignoring the economic impact; just giving a big "FUEU" to all those partners sure would hamper their foreign relations with their most important partners pretty bad. That's not something you can just fix on paper or something...you're talking about the well being of your neighbor here.

 

[Jason]

EU nations just writing off debt would be pretty crazy.

Yes.

But ANY solution is now crazy. And the do-nothing option is crazier still.

The New York Times suggests that Greece, Ireland and Portugal should take a ten-year "holiday" from the euro (plus a debt haircut). In keeping with what I'm suggesting. Meanwhile Bloomberg argues that the defaults should be carried out quickly. This is no longer the view of a single lunatic poster on lpsg :biggrin1:

Alternatively the EU may seek to support the periphery's debts through bailouts. But with just two small economies bailed out the ECB is "technically insolvent". Yes, more capital is being pledged, maybe double its present reserves, but that still won't cover a bailout for one of the larger economies, say Spain. Or there might in theory be massive wealth redistribution. A new 10% flat rate income tax, lets call it a Europe Tax, paid by everyone n Germany and France and given to the periphery (so that Greeks can continue to retire years before Germans) would work. But it isn't going to happen.

Splitting the euro into two may also work, basically a new DM floating off the top.

As the EU goes from muddle to muddle (this week's summit "success" was rubbished by the markets before it was even signed) we are looking at a perfect storm. Portugal must need a bailout very soon (and may take Spain with it). Spain and Belgium are facing downgrades. Bond traders make up their books to the calendar year end and there will be lots of trading on the secondary markets around 31st Dec. Italy has demonstrated the fragility of its government (and therefore its economy). Ireland's budget may be repealed next April. Greece is already at junk bond status. Ireland is fast sliding to junk bond status. And even if the ECB's capital is doubled all this will more than double its exposure. The ECB will remain technically insolvent for the forseeable future. And it won't take much for the speculators to get the jitters on this. Additionally the eurozone has no capacity right now for the unexpected disaster. If Vesuvius goes pop our first concern will be the humanitarian disaster. But it will also provoke a financial crisis in a system already stretched to breaking point.

What is truly crazy is that we are in this mess. But that is what happens if politicians break basic economic rules. I don't see any way forward which is not crazy. My view remains that our politicians should be more proactive in managing the crisis.

 

[Drifterwood]

Funny how when the Euro is fucked, it's £ sterling that is devaluing.

 

[dandelion]

hmm, probably speculation we might be thinking of taking on ireland as part of sterling.

All I can see from the discussion here is that whichever EU countries might now be considered 'rich' are already so exposed to bad effects if any of the weaker ones default that they cannot permit it to happen. None can afford to lose the euro. As to these technical difficulties about what the euro management can and cannot do, I think this is just a teeny issue with legalities. I'm sure it isnt legal to default on your debts, but you are proposing everyone do that. Once that process gets underway it will involve every single developed country in the world. Presumably every single bank and pension fund. That's plan B time, with an utter change to the world financial system as we know it.

 

[Jason]

Funny how when the Euro is fucked, it's £ sterling that is devaluing.

This is precisely why the eurozone is up the creek.

The euro is very well backed by reserves - it took the reserves of all the countries whose currencies it replaced. In addition it has been set up with no facility for QE or any other form of printing money. Curiously the currency almost floats above the countries it serves. We could in theory have all 16 eurozone countries leaving the euro and the euro would still exist as an international trading currency. The euro is rock solid. True if mega-catstrophe strikes there will be some sort of downward movement, but it will still keep most of its value. The "failure" and "survival crisis" is strictly around the eurozone, not the euro. But if few or no countries are using it the currency still exists (so I suppose it hasn't actually failed) but it has failed in its purpose. It would become a legacy currency used on extant contracts. But we would still be speaking of the failure of the euro.

The euro is killing the countries of the eurozone. Right now PIIGS + Belgium have serious problems - that's something like 40%+ of the eurozone. Additionally Germany is overheating.

Of course there are ethical issues around default. In the case of Greece there is now no doubt - ethical issues or not Greece will default. The speculation is around just what creditors will get back from ECB/IMF - and the value of Greek bonds on secondary markets suggests the expectations are in the region of 30-40%. Ireland is not yet in this position - curiously a default now could be quite a minor haircut and would be far better than the massive default the markets fear. IMO the moral fault is not around default but around getting into a position where default is inevitable. By extension I'm saying that the euro, designed to create a crisis and force political union, was an immoral construct, an act of political hubris in definance both of the will of people and prudent financial management. Its failure was inevitable. I'm forced to the view that the majority of politicians in Europe were so ignorant of basic economics that they did not realise this - and so arrogant that they ignored the near-uniform concerns of their economics advisors.

Yes the pound is devaluing somewhat. It is a modest and controlled downward slide. Perfect! This makes our exports a little easier to sell and imports a little less attractive. Moderate inflation reduces our eye-watering debt. We now have the possibility of putting up base rates a little and we can deal with the strengthening of the pound and the fall off in inflation hat this will cause. 2011 might even see us back using the standard monetary levers to manage an economy. The dangers of course are whatever happens with the eurozone (and particularly Ireland) but bear in mind that the markets have already factored in a lot of these issues. We have an interesting year ahead, and possible outcomes do include disaster, but they also include the government pulling off an economic blinder and catapulting the UK out of the downturn.

 

[Drifterwood]

The trade deficit grew despite your weak £ theories.

The reason is that you can't just stop importing overnight. There is a whole trading infrastructure, so devalue yes, but essentials that you import cost more. Hence the continuing and increasing trade deficit.

Your model doesn't work, Jase. I can see the UK becoming relatively poorer and poorer.

Oh, and if Ireland defaults, it brings our banks down. Have you got any money?

 

[B_nyvin]

Right now PIIGS + Belgium have serious problems - that's something like 40%+ of the eurozone

Italy has a small budget deficit at something like 5%....no where near greece/ireland/Spain levels (~9.6%) and a completely different world from UK (13.5%). It's also very close to a trade surplus. Italy has no danger whatsoever of defaulting or being in the same situation as greece and ireland. Further it's creditors are domestic and it's markets are incredibly diverse. Italy has a large national debt...whoopdeedoo...it's had it for the last ~30 years. Italy has very very little exposure to any of the bad economies also (unlike the uk with Ireland), except maybe spain. Italy isn't going to come crashing down.

Portugal, greece and ireland together add up to something like 5% of the eurozone. Spain added in makes it like 20% altogether. Yes all four are going to have crap economies for quite some time, but the Eurozone had growth over the last year overall, simply because of the other economies. The Eurozone could simply support these economies through funding of whatever kind pretty much indefinately if they wanted to...which they have stated quite blantently they want to, don't know if they will, but the bottom line is it's more up to the people to decide what happens next. It's not out of control like it's being made out to be.

 

[eurotop40]

Very much so. Plus, the weaker € is a blessing for german exports that would be totally blocked by a strong national currency. We see this with the stronger CHF now...

Italy has a small budget deficit at something like 5%....no where near greece/ireland/Spain levels (~9.6%) and a completely different world from UK (13.5%). It's also very close to a trade surplus. Italy has no danger whatsoever of defaulting or being in the same situation as greece and ireland. Further it's creditors are domestic and it's markets are incredibly diverse. Italy has a large national debt...whoopdeedoo...it's had it for the last ~30 years. Italy has very very little exposure to any of the bad economies also (unlike the uk with Ireland), except maybe spain. Italy isn't going to come crashing down.

Portugal, greece and ireland together add up to something like 5% of the eurozone. Spain added in makes it like 20% altogether. Yes all four are going to have crap economies for quite some time, but the Eurozone had growth over the last year overall, simply because of the other economies. The Eurozone could simply support these economies through funding of whatever kind pretty much indefinately if they wanted to...which they have stated quite blantently they want to, don't know if they will, but the bottom line is it's more up to the people to decide what happens next. It's not out of control like it's being made out to be.

 

[Jason]

Italy has no danger whatsoever of defaulting or being in the same situation as greece and ireland.

Can I hold you to this?

The bond traders place the chance of Italy defaulting as lower than the chance of Spain defaulting - but much higher than the chance of Germany defaulting. They clearly believe there is a significant chance of an Italian default.

Most Italian bonds are bought by their domestic market, often through small savers' savings accounts. There is a ripple of unease already. Italy has the unusal vulnerability that it could suddenly be in a position where its domestic bond buyers suddenly decide to hold on to their cash. This would be akin to a bank run - an action by masses of small investors. If Italians see problems say in Portugal and Spain this has the potential to create a problem in Italy, which might well be without proper foundation, rather a herd stampeding. The strengths of the Italian economy cannot withstand an irrational flight from bonds. And precisely because the market is not dominated by bond traders there is a chance of irrational action.

 

[Jason]

PERCENTAGE OF EUROZONE GDP CONTRIBUTED BY EUROZONE NATIONS
From 2009 World Bank GDP figures

Greece 2.6%
Ireland 1.8%
Portugal 1.8%
Spain 11.7%
Italy 17.0%
Belgium 3.8%

PIIGS + Belgium total = 38.7% - a bit less than the 40% I suggested above but still a big chunk.

Germany 26.9%
France 17.0%

 

[B_nyvin]

"Much higher then the chance of Germany defaulting..."

well no crap...why in gods name would Germany default? Lol...Trade surplus, large growth, low unemployment, average debt. If the Euro appreciates German savings value goes up, if the Euro devalues German exports get bought faster. By the time Germany defaults I'd say we have bigger things to worry about.

I don't know why you bothered with the exact math, but all it shows is Port/Greece/Ireland/Spain at 17.9%...a bit "lower" then what I said.

Most Italian bonds are bought by their domestic market, often through small savers' savings accounts. There is a ripple of unease already. Italy has the unusal vulnerability that it could suddenly be in a position where its domestic bond buyers suddenly decide to hold on to their cash. This would be akin to a bank run - an action by masses of small investors. If Italians see problems say in Portugal and Spain this has the potential to create a problem in Italy, which might well be without proper foundation, rather a herd stampeding. The strengths of the Italian economy cannot withstand an irrational flight from bonds. And precisely because the market is not dominated by bond traders there is a chance of irrational action.

Lots of "Could, might, possibly, chance, maybe, If, Whudifs" Not very believable.

This makes it all seem like Italy is a house of cards, whereas from your other posts the UK is a brick wall. I just don't see it this way.

 

[Drifterwood]

And precisely because the market is not dominated by bond traders there is a chance of irrational action.

:haha:

We should have a thread here discussing our views on markets and their traders.

 

[Jason]

All countries with big debts are a house of cards. The bailouts of Greece and Ireland demonstrate two countries falling. Almost all the EU countries are financial houses of cards - certainly including the UK.

Last spring the risk list (in order) was Gr, Po, Sp, It (PIGS) - to which Ireland was added (PIIGS - or politely the periphery).

Now the risk list is in Order [Gr], [Ir], Po, Sp, It, Be - and some would tag France on the end. Two casualties already.

The UK is not presently being talked about as "at risk". Had Labour won the last election we may well already have crashed. There is very little safety margin.

 

[Jason]

Fitch have downgraded Portugal (one band) and produced a report which in a nutshell says Portugal is performing less well than expected.

This brings the expected bailout of Portugal quite a bit closer.

The language used to talk about the euro has changed. Now there is pretty much consensus that the euro will not fail but that some countries (presumably Greece, Ireland and Portugal) will leave. Not long ago this would have been considered a failure, but we've changed the semantics. Don't you love eurospeak!