As that profound philosopher Yogi Berra once said, “it ain’t over ’til it’s over.” Well, the eurozone crisis isn’t over; in fact, it’s still in the early innings. Yogi also that “when you come to a fork in the road, take it!” That’s precisely what Europe hasn’t done. Down one road is fiscal integration; down the other is the disintegration of the eurozone. Europe is at the fork in the road but hasn’t decided which road to take. Nor will it. It’s most unlikely that we’ll wake up one day to learn that one road or the other has been selected. Instead, the road ultimately taken will result from a sequence of decisions taken in response to periodic flare-ups in the intensity of the crisis. Events, not careful deliberation, will determine the outcome, which will be years in the making.
Financial Times – Be sure to read all of the Münchau article.
- Wolfgang Münchau, “Eurozone fix a con trick for the desparate” — The con trick is collateralized debt obligations.
We are now in the stage of the crisis where people get truly desperate. The latest crazy idea, which is being pursued by officials, is to turn the eurozone’s rescue fund into an insurance company, or worse, a collateralised debt obligation, the financial instrument of choice during the credit bubble. This is the equivalent of putting explosives into a can, before kicking it down the road.
The big difference between a eurozone CDO and a subprime CDO is the the nature of the backstop. When the eurozone CDO fails, there are no governments that can bail it out because the governments themselves are already the equity holders of the system . . . If this CDO were to collapse, the eurozone might face an imminent break-up that could trigger a global financial crash.
- Stanley Pignal, “Richer EU countries try to cut pay-out” — Progress? What progress?
A planned €2.9bn ($3.8bn) European Union payment to Greece and other struggling countries could be reduced by at least half after some rich EU countries raised concerns about the impact on their own public finances.
- Chris Giles, “Treasury fear effects of a euro break-up” — Chancellor of the Exchequer Osborne is concerned over the “very, very great” risks to Britain.
“From the modelling we have done, the uncertainty [about the single currency] is already affecting the recovery and the risks [of a break-up] would be very, very great,” a Treasury official told the Financial Times.
. . . it is the financial linkages that are of greatest concern to economists, the Treasury and the Bank of England. British banks with assets across the eurozone would be hit hard by a break-up of the single currency and mass sovereign and country defaults. Even if money markets did not freeze again, as they did in 2008, banks would be forced to squeeze domestic credit even harder than now.
. . . a euro break-up would hit consumer confidence, encouraging households and companies to rein in their spending. A vicious spiral would develop between economic weakness and a fragile financial system.
- “Greece to miss deficit targets despite austerity” — Perhaps “despite” should be replaced by “because of.”
The dire forecasts came while inspectors from the International Monetary Fund, EU and European Central Bank, known as the troika, were in Athens scouring the country’s books to decide whether to approve a loan tranche . . . The shortfall in the 2011 deficit target means Greece would need almost 2 billion extra euros just to finance its expenses for this year. It also means additional emergency tax hikes and wage cuts announced in the past two months to hit the target have not been enough to put Greece’s finances back on track.
- “China paper urges Europe get act together on debt crisis” — Is this a veiled threat that China will sell its euro reserves? The call came in the overseas edition of the People’s Daily, the official paper of the ruling Communist Party.
If it is able to set up a fiscal union, Europe can still turn its luck around. If the decision comes too late, some (euro) members may be forced to pull out. But if Europe keeps dilly-dallying, the situation can only worsen and gather speed. Outsiders who want to help will not dare, and then the euro zone may really disintegrate. Without doubt, this would be a huge disaster for Europe and the world.
- James Forsyth, “Hague: The euro is a burning building with no exit” — As have others, the British Foreign Secretary, in an interview, likens the eurozone to the Hotel California: you can check-in but you can’t check out.
I described the euro as a burning building with no exits and so it has proved for some of the countries in it. But there are no exits.
- James Neuger, “Europe aims to dodge ‘scapegoat’ label” — Meeting in Luxembourg, European finance ministers are smarting from global criticism.
A 78 percent majority of Germans don’t trust the government’s assertions that another EFSF expansion won’t be necessary, an Emnid GmbH survey for Bild am Sonntag newspaper showed on Oct. 1.
The crisis-management gauntlet continues with an Oct. 9 meeting of Sarkozy with German Chancellor Angela Merkel, an Oct. 13 euro-area decision on Greece’s next installment, G-20 finance ministers meeting in Paris on Oct. 14-15, and an Oct. 17-18 European Union summit in Brussels. The G-20 summit is Nov. 3-4 in Cannes, France.
- Harry Wilson, “Banking crisis set to trigger new credit crunch” — The cost of insuring bank bonds hits new highs.
In Europe, French and Belgian government officials are due to meet on Monday to discuss the crisis enveloping Dexia as speculation mounts about a possible break-up of the Franco-Belgian lender . . . Dexia, along with other European lenders, has been hard hit by the closure of the interbank lending markets and the continuing unwillingness of investors to buy the bonds of eurozone banks.
Credit default swaps on Bank of China bonds have more than doubled since the beginning of August and hit 316.53 basis points at the end of last week, their highest level since March 2009, while the lender’s shares hit a 12-month low.
- Ambrose Evans-Pritchard, “Protectionism beckons as leaders push world into depression” — The world savings rate has surpassed its modern-era high of 24 percent.
The International Monetary Fund (IMF) expects the savings mountain to rise yet further next year as the governments of Europe, Britain, and the US tighten belts, in unison, by up to 2pc of GDP. This is double the intensity of the last big synchronized squeeze in 1980. They will do so before the private sector is ready to grasp the baton, and without stimulus from the trade surplus states (Germany, China, Japan) to offset the contraction in demand. Put another way, there is a chronic lack of consumption in the world.