Europe at the Brink

Absolute bloodbath in the Euro today.

Uncle Eddie, what's your take on this issue? Do you think the ECB and other institutions can fully stabilize the market? And if not, what would be the end consequences for the rest of the world?

Based on what's happened over the past 24 months, I think even if the ECB decided to step in (meaningfully), it would be too little, too late.

The problem with the Eurozone is that it's not like Texas going to bat for New Mexico. These are completely separate countries most of whom are populated by people who hate the other guy. I think the video is correct that it all comes down to Merkel, but I don't think she'll be able to pull the trigger against the clear will of the German people. Trust me - they don't give a rat's ass what happens to Greece. Ironically, German's were more exposed to US sub-prime debt than they were to the sovereign debt of peripheral Eurozone partners.

That said, a collapse is obviously bad for Germany's commerce within the zone, although those consequences would be somewhat blunted by a declining Euro for exports abroad.

I really don't know what the end consequences will be for the rest of the world. But the fact remains that people will still eat and drink, go to work, play with their kids, live and die. The fate of any given government or any nebulous social constructs ultimately has little to do with the day to day life of the 7 billion inhabitants of this sorry world.

That's why I was so against TARP and the bank bailouts. Who gives a shit? Life goes on.

Two words = fiscal transfer

This, as Eddie alluded to earlier, is all that seperates the plight of {insert indebted US state here} with {insert peripheral European country here}.

This crisis is actually a great thing for Europe in the long term, as it will strengthen common European Fiscal policy and bring Europe closer together. Europe messed up back in the beginning of the 21st century, when introducing the Euro without planning it carefully enough, and this is why we are in the situation we are in today. However, it can still be fixed, if we give the ONE eurozone ONE administration instead of several national ones. And finally, I believe the 2011 events, both in Europe and in the US, have shown the Western World that we cannot forever live on debt. And therefore, again, I think this is a very healthy crisis, that had to happen at some point and I'm glad it happened now rather than later. To sum up, in the short-term we suffer, but in the long-term we come out united, stronger and less dependent on debt.

"I really don't know what the end consequences will be for the rest of the world."

I think I can help you with this line. European banks are the biggest providers of credit to EM businesses. If monkey shit hits the fan for european financial institutions, all these companies are going to lose their lending arrangements, slowing their own growth. If these companies slow down, their countries slow down, meaning they will import less. Now China and USA, both which have been dealing with losing customers in Europe, now have to worry that their EM customers might buy less.

Wont be the end of the world, but everything will be shitty for a long time, way longer than anticipated.

The markets are clearly getting irrational on some levels.

1.) The US is the only country that claims the authority to tax international corporate income.
2.) Many of these European companies have 60%-70% or more of the substance of their business abroad. The production, the sales, the profits, etc. They just happen to be headquartered and traded in Europe. For this, they're down 1-2% today instead of flat or slightly up. 3.) You can nationalize these companies' European assets and many of them are still cheaper than their US counterparts.

In short, Americans seem to think it's no big deal while European traders seem to be afraid of WWIII.

IP,

The Euro seems a little oversold today, but I'm thinking it'll be somewhere around 1.20 six months from now, so based on that I think there's a lot more room to the downside.

You make an excellent point about European companies. I think the biggest risk there is credit tightening, and not anything on their balance sheets or with their business models.

Thank you for sharing that was a really informative video.

jap confirming that Germans dont really give a fuck what happens to Greece. And I think its Merkel to decide.

Two things why Merkel won't go for eurobonds or any transfere facility:

1. In the perception of the people Greece tricked all the other euro countries and lived la dolce vita for several years (which is kind of true since everyone would have earned less with a sound fiscal policy in place). In fact there are increasing resentments towards all the southern countries.

2. Germans hate to give money. After 1990 the west of Germany subsidised the east in a transfere union. And the people hate it, although they are all Germans. If they were to decide, this facility would cease to exist within days. And now imagine how much they would hate to pay for those guys that pulled off la dolce vita ... nah not gonna happen

Btw Im German

Thanks for the video

Apologies for the long post (I'm GMAT procrastinating)...

Gotta love the policy recommendations / WSJ propaganda at the end of that clip, basically, Europe should become like America (Fck yeah!), make sure nothing happens to bond holders or disappear in an European wide war! .... (Fck yeah added...)

The short version is: Countries default on their debts. it's what they do. politicians should accept that this is a valid policy choice and that lenders/banks/bondholders who made bad loans have no claim to public bailouts, they should prepare accordingly by making sure banks can restructure without freezing up the system Lehman style (i.e. conservatorship, debt to equity instead of liquidation, operations continue) ... not gonna happen, governments will muddle through instead.

Long version Germany can't bail out all of the countries in trouble without getting into trouble itself, especially if a large country like Italy defaults. Germany is not that big, let's not kid ourselves. To my eyes the choices Europe faces long term are:

1 - Fiscal Union & Central Treasury: (the option the WSJ are propagandising for in this clip) This would probably start with a central Euro treasury to pool Euro debts, but would lead eventually to a EU government that can tax citizens. This allows them to make Keynsian or Austerity policy choices at the European level, but raises key issues of sovereignty, democracy, etc... The UK saw this coming and opted not to join the Euro dream.

2 - Roll back the Euro currency experiment: Some countries exit monetary union (the Euro currency), but remain part of the common market (trade, labour mobility, etc...). This would allow them to default and to introduce some reality in the bank balance sheets and credit markets. Why socialise bad lending decisions like Ireland has done?

3 - Muddle through: Use monetary policy, fiscal co-operation, TARP-like schemes and other tools to prop up bond prices, bank balance sheets and generally expand balance sheets Europe wide in a hidden way. Doesn't really solve any of the key issues and will have unanticipated secondary effects.

My bet is that they'll take option 3 (muddle through, it's the politician's code), until a country that they can't bail out this way decides to default. I think option 2 makes more sense, but they will have to prepare for bank failures and figure out a way to put banks into conservatorship and restructure them instead of the mess that happened with Lehman. This isn't on the agenda and there is no way a politician / Eurocrate is going to "lead" this ahead of the time it is needed.

A bit of history: How often to countries default? - Several major world powers defaulted in the 1500s - 1800s (England, France, Germany, Spain) - 25 countries in 1931 - 1940 period. (Mainly Latin American and European, some others) - 50 plus countries defaulted in the 1974 - 1989 period. (All over the world, mainly emerging economies) - Until the recent Greece issues, the last 10 years have been unusually mild in terms of the number of sovereign defaults. For most people on this forum and junior/number crunching parts of finance, the Asian crisis and Russian default of the 90s are ancient history - It's not just shitty little countries that default. Superpowers do as well

They don't teach you that at financial engineering / computer science school...

For some background check out: This Time is Different: A Panoramic View of Eight Centuries of Financial Crises http://www.economics.harvard.edu/files/faculty/51_This_Time_Is_Differen…

People are dramatic.

In the early 80's U.S. banks were 250%+ exposed to South American sovereign debt when basically the entire continent defaulted. Banks stayed afloat, countries restructured, and a bunch of governments unfit to rule got axed. Now U.S. banks are ~5% exposed. As one of the above posters stated this is healthy for Europe long-term.