The euro is finished: der Euro ist fertig!
December 2, 2011
Bond spreads are narrowing because there is growing confidence that a solution is imminent that will end the contagion effect.
However, that solution may not be the one you hope for:
I’m not going to use any mathematical laws of probability on this, but this could be done, there is currently very high risk, if not high probability of the following:
Following Sarkozy Toulon speech, given the lengthy negotiations that will be required to redesign European Treaties, we could be expelled from the EMU with a new hardening of the rules to be imposed on member states. Those rules may by majority make it impossible for peripherals to remain within the EMU.
There may already be a new core Treaty ready for signature by Germany and France initiating a core EMU with Germany leading a number of core countries out of the old and into the new.
This would also mean changes to the current Treaty on the the terms under which this tier 2 group, those remaining on some second level EMU status, could continue to retain membership of tier 2.
Less likely imho the EMU and ECB will be disbanded and the flag of a new redesigned EMU ready for application by intending members made ready for some future point.
High probability exists for any of these scenarios:
One thing for sure, the EMU as we know it is finished: der Euro ist fertig
Its a mistake to think this is a euro crisis that can be solved by the ECB. This is a world currency ‘floating’ dollar crisis on the verge of getting out of control.
The chaos we have now was there in the floating currencies of the 1930’s. Bretton Woods was required then to intervene and created the dollar as the world reserve currency with the dollar at $35 an ounce.
Unfortunately, the dollar/gold peg was removed in the early 70’s and aided and abetted with the birth of financial intruments such as derivatives and OTC’s instability and finally chaos beckons as it did in the 1930’s.
We need a global solution, a new G20 world reserve currency, such as that proposed by Keynes, ‘the bancor’, with a new FOMC type body composed of reps from each of the world’s major economic zones with fixed exchange rates based on gold. 
This would avoid a current forex mess damaging markets and announcement of a coordinated move by Central Banks such as the FED to relieve pressure on the euro:
http://en.wikipedia.org/wiki/Central_bank_liquidity_swap
“These swaps involve two transactions. When a foreign central bank draws on its swap line with the Federal Reserve, the foreign central bank sells a specified
amount of its currency to the Federal Reserve in exchange for dollars at the
prevailing market exchange rate. The Federal Reserve holds the foreign currency in an account at the foreign central bank.
The dollars that the Federal Reserve provides are deposited in an account that the foreign central bank maintains at the Federal Reserve Bank of New York. At the same time, the Federal Reserve and the foreign central bank enter into a binding agreement for a second transaction that obligates the foreign central bank to buy back its currency on a specified future date at the same exchange rate. The second transaction unwinds the first.
At the conclusion of the second transaction, the foreign central bank pays
interest, at a market-based rate, to the Federal Reserve. When the foreign central bank lends the dollars it obtained by drawing on its swap line to institutions in its jurisdiction, the dollars are transferred from the foreign central bank’s account at the Federal Reserve to the account of the bank that the borrowing institution uses to clear its dollar transactions. The foreign central bank remains obligated to return the dollars to the Federal Reserve under the terms of the agreement, and the Federal Reserve is not a counterparty to the loan extended by the foreign central bank. The foreign central bank bears the credit risk associated with the loans it makes to institutions in its jurisdiction.”
This essentially is an attempt to transfer pressure off the euro onto new dollar denominated backing by the Federal Reserve.
I’m curious as to how the arrangement in some form of reciprocal way doesn’t transfer risk onto the Federal Reserve and weaken the dollar?
FAQ:
http://www.federalreserve.gov/monetarypolicy/bst_swapfaqs.htm#5631
“How were the swaps structured?
The Federal Reserve provided U.S. dollars to a foreign central bank. At the same time, the foreign central bank provided the equivalent amount of funds in its currency to the Federal Reserve, based on the market exchange rate at the time of the transaction. The parties agreed to swap back these quantities of their two currencies at a specified date in the future, which was the next day or as far ahead as three months, using the same exchange rate as in the first transaction. Because the terms of this second transaction were set in advance, fluctuations in exchange rates during the interim did not alter the eventual payments. Accordingly, these swap operations carried no exchange rate or other market risks.”
Actually, the above is disingenuous. It presupposes that ability to pay exists and the currency hasn’t crashed. That’s dollar risk.
There is also bigger risk for the euro Central banks: come payback time, if the euro has considerably weakened against the dollar, there will be a big price to pay by the CB’s under the ECB.
‘The house always wins’ doesn’t always happen in the casino especially if you are Don Quixote and you back a donkey.
In 1998 one of the reasons that caused the Russian financial collapse was the attempt to maintain a too high fixed exchange rate just as right now our own exchange rate is damaging us. There has been high volatility on the forex markets with exchange rate of euro too high against the dollar recently. This was the reason for major objection from Trichet on US QE over the past two years, the euro was hurt rising in value against the dollar.
In the Forex casino, counter intuitively, if the euro falls further against the dollar, its rising slightly at the moment, its fall will be hastened against these forex payback contract obligations. If its value rises against the dollar, there’s vast profits to reap eg on one of these ‘cheap liquidity’ dollar loans exchange rate rising from 1.32 Euro/dollar purchase of 132 bn yields a 2 billion profit less inflation on a rise to 1.34/dollar.
Another beneficial effect of these swaps is the calming of CDS speculation against the euro where CDS triggers are effected in particular exchange rate milestones.
This may be the major intent of these moves as its a toss up whether the euro rising against the dollar in the long term is of any beneficial effect to long term prospects for the euro 
I totally disagree with the view of the FT Dec 8, 11 that the euro must be saved.
On the contrary, I believe the euro has a terminal disease and it must be allowed to die in an orderly and peaceful way as possible.
Therefore I believe the following quote is pure rubbish:
“So badly have European governments undermined their own credibility that the only way to shock markets back to confidence is by putting hard money on the table. The straightforward way would be to use the European Financial Stability Facility to the hilt. The EFSF would raise a large warchest to support the prices of new bonds issued by any sovereign that is solvent, at the lowest rates it can afford to charge.”
I do agree the ECB under Trichet has been badly managed from the outset crippled with the inability to intervene in sovereign markets and turning a blind eye to housing bubbles and reckless spending.
However, that’s not my main reason for wanting to see an end to the euro, some patients are not doomed to die as the euro is.
Fixing it now is like trying to fix a jet airliner over the Atlantic whose engines have failed!
I strongly encourage readers to see the excellent “The Inside Job” reported here in The Guardian re BBC2 reshowing last night
Highlighted is the number of academic economists who had conflict of interest with the hedge funds, banks, and the pyramid that fed on the financial derivative bubbles that brought about the Lehman’s collapse and, I believe, will bring about the collapse of the euro. So watch from out of the timberwork hordes of tiny tims, financial bottom feeders, market analysts, government spokes persons whose interests lie in the financial Coup d’état currently being attempted by banks and financial institutions against democratic government at the present time.
What do you mean by that paragraph above?
Here is an example of what I mean?
J.P. Morgan Chase & Co. put out a report Wednesday that advised investors and companies to hedge against a collapse of the euro zone—though the bank said the likelihood of that happening was just 20%. It said many corporate clients were buying currency derivatives to place bets against the euro.
Unfortunately since 1971 the world has been afflicted with a growing derivative market that threatens the stability of all fiat currencies including the dollar. Trillions of dollars of investments are riding on financial instruments such as CDS, OTC, forex swap markets; combined with the lack of regulation governing the rules of trade in these markets, combined with massive over leveraging by these investment banks and financial institutions, such investment lines have undermined currency to such an extent that along with housing bubbles due to unregulated OTC’s, currency failure is now inevitable.
Failure of the euro will go a long way to liquidate losses and clean up currency markets. Currently the euro is not in a state of collapse due to housing bubbles alone. Primarily it is in a state of collapse because its losses in the casino markets due to failing subprime OTC’s in the US; EMZ’s over leveraged investment banks who’ve been failing in these markets since 2008 in europe, have not owned up through adequate stress testing, to their losses.
The euro has become through lack of regulation a huge casino making fortunes for the corrupt financial markets. The speculators in the insurance funds, the investment banks, the bonuses and profits in the millions, billions and trillions, are at stake if the euro casino gets burned.
Pouring more money on this fire will be disastrous for democracies in Europe and disastrous for the people of europe. It will make more profit for banks and financial institutions, but even for them, gain will only be short term.
We need to return to national currencies that will fairly measure and promote fair trade between nations. Industry and manufacturing, enterprise, creativity and innovation, should no longer be set aside in favour of chasing paper, virtual profits in financial instruments that smother real development.
Pouring more money into the euro now is to pour it into a toxic financial system whose main players should be in jail on charges of incompetence and corruption.
Let’s take down the euro. Get the G20 together for a new Glass Steagal that will outlaw wanton speculation and corruption in the derivatives market. Get national governments to police their banking and currency systems with adequate regulation.
Introduce proper stress testing on a global basis. The 6 largest banks in the USA control 60% of US GDP and are responsible for the plundering of manufacturing of the US middle class and disappearance of manufacturing in the US…Break up these banks under new currency rules to brake financial trading in derivatives and promote true economic development
If we stay in the Euro, we are turkeys for Xmas! We can say goodbye to democracy in Ireland, wealth in Ireland and the nation’s health!
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