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Euros are in a muddle for the next decade


maxwellreid

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Hi Dave

 

Of course nothing is certain and we exist in a world of probabilities and contingencies and reflexivities but...mate I think we are long past avoiding a euro trainwreck, it is now a matter of when and in what form that happens. As the dude in my signature block sort of noted: a crisis often takes longer to happen than we expect but when it eventually happens everything happens faster than what we are ready for.

 

I remember reading a book about a prominent jewish banking family, who had a major presence in Vienna and Paris in the latter part of the 19th century and into the 20th century. As they moved through the 1920's and 1930's there was growing animosity from some sections of Austrian society towards the jewish community (who were mainly fairly recently arrived migrants from the east and by sheer weight of numbers, by obvious differences, and by forceful activity had begun to influence Austrian life). Many jewish families began hedging their bets by moving some of their wealth out of Austria, mainly to Switzerland but also to places like the UK and the US. The father of this family however considered himself a proud Austrian and was determined to remain 100% committed to the country so he kept his branch of the family's wealth all in Austria.

 

Of course it was the failure in 1931 of a jewish run Austrian bank, Creditanstalt, that is said to have been the final straw that broke the world's finanical system (and was later used as an excuse for the initial persecution of jewish people in Austria when the nazis moved in, in 1938).

 

Anyway the point is that being a banker this chap must have known that Austria was suffering long-term capital flight but he let his heart lead his head. As the saying goes, in a crisis it is entirely rational to panic. The rational thing for him to have done was to start moving some of his family's wealth out of Austria (but in doing so perhaps confirming the suspicion of some that the jews were only fair weather Austrians (?)). As it turned out whilst most of his family were able to get away from the Nazis and end up in the West they lost almost all of their material possessions.

 

I suspect that where we are in this slow motion euro crisis is that more and more money is being moved out of euro periphery because enough people see the crisis as being unavoidable. And in a feedback loop this capital flight is ensuring that there will be a crisis, the only questions are when and in what form the crisis happens.

 

I came across this piece in the London Telegraph a few days ago but did not post a link to it on ss as the data seemed to me to be a bit dated. But I suspect things have not much improved in recent times so the charts included are useful in showing that today's Spain and Italy appear to be in the same death cycle of capital flight that Austria suffered in the 30's. Not a good prognosis for them or for the euro I'm afraid.

 

http://blogs.telegraph.co.uk/finance/jerem...-graph-of-doom/

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Stu

 

Yeah sorry 'bout that: broke the cardinal rule on chatsites I know, but I was merely trying to suggest that the storyline may repeat, not that the cast would also be the same (my uninformed guess is that this time around MENA muslims who have migrated to Europe may get a leading role (????)).

 

Anyway why bother couching possible scenarios in probabilities and contingencies when you have a key central banker willing to talk in absolutes.

 

The euro is ÃÆâ€â„¢ÃƒÆ’ƒâہ¡ÃƒÆ’‚¢ÃƒÆ’¢Ã¢Ã¢Ã¢Ã¢â€š¬Ã…¡Ãƒâ€šÃ‚¬ÃƒÆ’…¡Ãƒâہ¡ÃƒÆ’‚¬ÃƒÆ’â€Â¦ÃƒƒÂ¢Ãƒ¢Ã¢Ã¢â€š¬Ã…¡Ãƒâ€šÃ‚¬ÃƒÆ’…âہ“irreversibleÃÆâ€â„¢ÃƒÆ’ƒâہ¡ÃƒÆ’‚¢ÃƒÆ’¢Ã¢Ã¢Ã¢Ã¢â€š¬Ã…¡Ãƒâ€šÃ‚¬ÃƒÆ’…¡Ãƒâہ¡ÃƒÆ’‚¬ÃƒÆ’â€Å¡Ãƒƒâہ¡ÃƒÆ’‚ and the beleaguered currency union is not in danger of collapsing, according to European Central Bank President Mario Draghi, who also argued that eurozone nations will eventually be bound even closer together.

 

So why would someone in such an informed position be willing to be so unrealistically titanic-like in his confidence?

 

Mr Draghi claimed that the currency was ÃÆâ€â„¢ÃƒÆ’ƒâہ¡ÃƒÆ’‚¢ÃƒÆ’¢Ã¢Ã¢Ã¢Ã¢â€š¬Ã…¡Ãƒâ€šÃ‚¬ÃƒÆ’…¡Ãƒâہ¡ÃƒÆ’‚¬ÃƒÆ’â€Â¦ÃƒƒÂ¢Ãƒ¢Ã¢Ã¢â€š¬Ã…¡Ãƒâ€šÃ‚¬ÃƒÆ’…âہ“absolutely notÃÆâ€â„¢ÃƒÆ’ƒâہ¡ÃƒÆ’‚¢ÃƒÆ’¢Ã¢Ã¢Ã¢Ã¢â€š¬Ã…¡Ãƒâ€šÃ‚¬ÃƒÆ’…¡Ãƒâہ¡ÃƒÆ’‚¬ÃƒÆ’â€Å¡Ãƒƒâہ¡ÃƒÆ’‚ in danger when asked by FranceÃÆâ€â„¢ÃƒÆ’ƒâہ¡ÃƒÆ’‚¢ÃƒÆ’¢Ã¢Ã¢Ã¢Ã¢â€š¬Ã…¡Ãƒâ€šÃ‚¬ÃƒÆ’…¡Ãƒâہ¡ÃƒÆ’‚¬ÃƒÆ’¢Ã¢Ã¢Ã¢Ã¢â€š¬Ã…¡Ãƒâ€šÃ‚¬ÃƒÆ’…¾Ãƒâہ¡ÃƒÆ’‚¢s Le Monde newspaper in an interview.

 

We see analysts imagining the scenario of a euro zone blow-up,ÃÆâ€â„¢ÃƒÆ’ƒâہ¡ÃƒÆ’‚¢ÃƒÆ’¢Ã¢Ã¢Ã¢Ã¢â€š¬Ã…¡Ãƒâ€šÃ‚¬ÃƒÆ’…¡Ãƒâہ¡ÃƒÆ’‚¬ÃƒÆ’â€Å¡Ãƒƒâہ¡ÃƒÆ’‚ he said. "They don't recognise the political capital that our leaders have invested in this union and Europeans' support. The euro is irreversible."

 

I guess he is saying that bad things like the Great Depression only happened because the leaders of the time had not invested sufficient political capital in continued growth and stability. Good to know that they are fair dinkum this time round ...

 

http://www.telegraph.co.uk/finance/9417209...ays-Draghi.html

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Since no money system could tolerate such a sustained attack for long, the outflows are compensated for by "target 2" inflows from the European Central Bank, which in turn borrows the money from the eurozone's creditor central banks, in particular the Bundesbank.....

....In Germany and other creditor nations, there is growing concern over the consequent build up of contingent liabilities. Deposits made through German banks are in essence funding Spanish and Italian assets on an ever expanding scale. If these countries left the euro, then Germany would face massive, unfunded liabilities.

 

http://blogs.telegraph.co.uk/finance/jerem...-graph-of-doom/

 

I don't quite get it.

If the ECB borrows from the Bundesbank to direct funds to Spain, how do those liabilities eventually become unfunded to the Bundesbank.

Does the ECB default. I thought they'd just print.

In a BBC interview a while back, Ken Rogoff reckons the ECB will eventually need to inject around $2 to 4 trillion to get the Eurozone out of the mess.

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B

 

Good question.

 

Maybe under the current system it is not the ECB that gets to carry the loans that go bad but rather it is each country's central bank that lent the money through the ECB. This may be why every time they suggest further action by the ECB they seem to have to go back through the approval process through each of the EU member states (and why Finland has insisted on Spain putting up some collateral).

 

http://www.google.com/hostednews/afp/artic...4ebab63871a.381

 

There has been lots of talk about the EU forming a closer financial union, and perhaps one of the changes touted may well be that the ECB acquires greater legal status so that it can stand by itself when making loans.

 

At the time of reading that Tele article I had assumed the journo had used "default" loosely. A while back, mainly amongst the Austrian economists and their followers, it was all the craze to use "default" to mean not only an acutal default but also where through inflation the value of the loan paid back over time is much less than what was lent in the first place. A bit of a stretch for me, as if people wanted to be repaid money of the same value then they should have written the contracts to say that (what usually happens is that lenders expect any loss of value of the principal to be covered in part by the interest being paid). This creeping devaluation of the principal that is repayable certainly does not cause the level of trauma that an outright default would (I guess akin to tthe frog in the cooking pot).

 

In the scenario where some Spanish borrowers defaulted and the ECB had to wear those losses (rather than the central bank in each of the creditor nation state) if the ECB were to turn on the printing presses then there would be a flood of euros coming into the market which should push the value of the euro down. So even if the ECB paid back the Germans in full using the freshly printed euros the value of the returned money would be much less than what was lent in the first place (sort of a partial ongoing default).

 

Either way there is great deal of theatre going on where the circuit is being maintained only through everyone ignoring that Spain and Italy are terminally bust.

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thought this one should posted here

 

===========

Stocks rose, halting a four-day selloff, after Draghi said the ECB will do what it takes to ensure the euroÃÆâ€â„¢ÃƒÆ’ƒâہ¡ÃƒÆ’‚¢ÃƒÆ’¢Ã¢Ã¢Ã¢Ã¢â€š¬Ã…¡Ãƒâ€šÃ‚¬ÃƒÆ’…¡Ãƒâہ¡ÃƒÆ’‚¬ÃƒÆ’¢Ã¢Ã¢Ã¢Ã¢â€š¬Ã…¡Ãƒâ€šÃ‚¬ÃƒÆ’…¾Ãƒâہ¡ÃƒÆ’‚¢s survival.

 

ÃÆâ€â„¢ÃƒÆ’ƒâہ¡ÃƒÆ’‚¢ÃƒÆ’¢Ã¢Ã¢Ã¢Ã¢â€š¬Ã…¡Ãƒâ€šÃ‚¬ÃƒÆ’…¡Ãƒâہ¡ÃƒÆ’‚¬ÃƒÆ’â€Â¦ÃƒƒÂ¢Ãƒ¢Ã¢Ã¢â€š¬Ã…¡Ãƒâ€šÃ‚¬ÃƒÆ’…âہ“Within our mandate, the ECB is ready to do whatever it takes to preserve the euro,ÃÆâ€â„¢ÃƒÆ’ƒâہ¡ÃƒÆ’‚¢ÃƒÆ’¢Ã¢Ã¢Ã¢Ã¢â€š¬Ã…¡Ãƒâ€šÃ‚¬ÃƒÆ’…¡Ãƒâہ¡ÃƒÆ’‚¬ÃƒÆ’â€Å¡Ãƒƒâہ¡ÃƒÆ’‚ Draghi said in a speech in London today. ÃÆâ€â„¢ÃƒÆ’ƒâہ¡ÃƒÆ’‚¢ÃƒÆ’¢Ã¢Ã¢Ã¢Ã¢â€š¬Ã…¡Ãƒâ€šÃ‚¬ÃƒÆ’…¡Ãƒâہ¡ÃƒÆ’‚¬ÃƒÆ’â€Â¦ÃƒƒÂ¢Ãƒ¢Ã¢Ã¢â€š¬Ã…¡Ãƒâ€šÃ‚¬ÃƒÆ’…âہ“And believe me, it will be enough.ÃÆâ€â„¢ÃƒÆ’ƒâہ¡ÃƒÆ’‚¢ÃƒÆ’¢Ã¢Ã¢Ã¢Ã¢â€š¬Ã…¡Ãƒâ€šÃ‚¬ÃƒÆ’…¡Ãƒâہ¡ÃƒÆ’‚¬ÃƒÆ’â€Å¡Ãƒƒâہ¡ÃƒÆ’‚ÂÂ

http://www.bloomberg.com/news/2012-07-26/e...-estimates.html

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can we believe him?? :unsure:

 

 

 

 

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