One of the main arguments used to stop countries quitting the eurozone is that their debts are in euros and their currencies will fall after they leave, raising their national debt levels from say 200% of GDP to 400% of GDP.
But that argument fails to address the fact that markets can move.
The US managed to save their financial economy just in time when the Lehmans moment arrived. It was a near run thing, by all accounts. Letting Lehmans go was a grave risk, but it showed everyone that this crisis was getting more than serious and that all players needed to get themselves ready to face a downturn of unparallelled proportions by reducing their debts. In the USA M3, the statistic of the money supply, is no longer published, but those that reassemble statistics say that it is in free fall, as debt is no longer so freely available as it was pre-crisis. I can imagine that being an understatement.
Anyone who imagines that QE makes that much difference is not thinking. The QE is a fraction of the scale of the fallback in the money supply taking place, and even then governments will face limits to how much they can borrow and in turn lend or spend, as lenders tire.
The same influences are being felt in Europe. So far the banking crisis has been contained, and the sovereign debt crisis, but the willingness of Germany to act as a bulwark for all the debtor countries is already running out. The EU wants to press ahead without a Treaty and enforce a role for itself as the effective economic government of Europe, but the EU has no money. It’s not even a paper tiger.
The EU will only survive if Germany is willing to save it, and while Merkel wants to do that, her position depends on a coalition, and both her coalition partners are getting cold feet about more and more bail-outs, and her position is eroding fast, not to mention that the German Courts are insisting that the EU cannot act as Germany’s government, but must pass key measures such as bail-outs, which are not permitted under EU Treaties, through the German Parliament.
The first bail-out went through the German Houses of Parliament without a problem. But as time goes on, German bunds are now failing to sell to full value as the lower interest rates on offer from the German government to lenders is lowering demand. The noose is tightening.
If events spiral out of control, one thing is certain. The Euro will crash. While Greece currently talks of devaluing the currency and relaunching the Drachma, what would be the situation if all her debts in Euros became effectively worthless – not because of inflation, far from it, but because all fiat money is paper, based on a promise. What if the ECB was unable to trade Euros and there was nowhere for people to go to claim all their money back, or exchange it?
That would be the situation to be faced by the world, although no news channel dare say it.
Greece’s Euro debts would be effectively zero. She could relaunch the Drachma, totally broke but debt free. The world would lose about 20% of its reserves overnight, which is why China is now reviewing her sovereign funds placed into European government debt. She fears default. But if China started withdrawing her funds, that would precipitate the very crisis she fears.
The end of the Euro will be the biggest financial write-down in human history.
Get ready. Greece should be getting the Drachmas ready now, and others. There might only be three more months left before this actually happens.
If nothing else is made ready, the dollar will overnight become the effective currency of Europe, as there will be nothing else available. The US government would not be willing to assume responsibility for all this mess. Each country would need to launch its own currency and establish an effective dollar link. But are they ready with all their politicians still making Euro-speak? That is the problem. European politicians are not aware of what they will be facing and are not making preparations.
It must be with these thoughts in mind that David Cameron is pulling his punches when it comes to dealing with the EU. He fears the meltdown, and knows that delaying the crisis is the only current tactic, unless somehow Barroso persuades Germany to permit the ECB to issue funds backed by Germany. But that looks like creating an even bigger hole. The more people who get sucked into saving the Euro, the worse the crisis gets.
The only solution to this crisis is default. The sooner it is realised and people get their heads around it, the better. An organised and agreed programme of defaults would be better than facing the possibility of total meltdown. Greece, for example, should be sent on her way with the Drachma and her sovereign debts substantially written off.
This crisis could be dealt with intelligently, but all political leadership is facing the wrong way. That is the problem.
UPDATE – China and Kuwait deny they are pulling out of Euro-denominated sovereign debt.
What else would you expect them to say?!!!
PLUS – a comment from politicalbetting.com
“Spanish accounting was completely out of line with the rest of Europe,” said Hans Redeker, currency chief at BNP Paribas. “It had reached a point where investors no longer believed in Spanish balance sheets because equity ratios are distorted by overvalued holdings of real estate. This move was absolutely the right thing to do. You can’t camouflage bad debts any longer. Those days are over,”
by The Ghost of Harry Flashman May 28th, 2010 at 9:37 am
That’s a great comment. The same applies at national level. Debts require two things, an admission they exist first, and a decision as to what to do about them second. The days of denial are closed.
The best way to save the ‘northern’ euro, is to shuffle off the ‘southern’ euro. The longer this move is delayed, the greater the danger of an economic collapse of gargantuan proportions. As for sterling, the government needs to make as many moves as it can towards lowering the country’s debts and boosting its growth rate. Raising taxes is not the way to do that. Cutting government spending is.
See when will the euro collpase? from the Adam Smith Institute.