Saturday, 10 September, 2011

Money Matters : Be Scared, Be Very Very Scared.............


Fragility in the European Banking system.

Are we moving towards end-game?


Cost of Portugese and Greek bonds at record levels vs. the Bunds (extra yields of roughly 5 and 10 percent respectively).

Sovereign CDS prices climb..

And the Oracle of Omaha puts in his two cents worth.

However, the Euro holds on the weakness of the dollar rather than its own strength.


So, will we enter 2011 with optimism on this front?

At least the Economist blog doesn't think so. Here is an extract.

Lately, The Economist has been arguing that 2011 is likely to be a year of financial shocks, with Europe the likeliest of sources for them. Indeed, as Michael Pettis says, 2011 will probably prove to be the year of the euro zone endgame. Amid austerity and continuing crisis, national elections will begin throwing up leaders for more sceptical of the European project than the bunch now in power. The European attitude could move from commitment to stay together but disagreement over the distribution of costs to widespread ambivalence about the euro zone itself. If markets observe such a shift emerging, they'll rapidly bring matters to a head. No one wants to be holding the bag when the end finally comes, and market players will start selling while the selling is still good.

In the context of the disagreement among the EU members on the way forward;

It isn't difficult to understand the motivations of leaders across the euro zone, but they're clearly playing with fire. If they can't bring themselves to extinguish it once and for all in 2011, the single-currency will be lost in the ensuing conflagration.

We enter 2011 with things still on a slow boil.


"Greece is the great experiment, the laboratory of Europe," said Theodore Pelagidis, professor of economic analysis at Pireaus University. "What happens here will determine what happens in Europe. and if the euro breaks up, survives and on what terms it survives."

Not really. That distinction should go to Spain as per Robert Halver, Head of Market Research, Baader Bank. In his words, "If Spain gets into trouble, then we would have a serious problem. Spain is too big to bail, not too big to fail, but too big to bail."

Coming back to the Spartans;

-         Greece asks for extension to repay Euro 110bn of debt from the IMF
-         The Greek deficit was at 15.4% in 2009
-         Public debt projected to reach 160% of GDP by 2013
-         Unemployment to hit 15% next year
-         S&P warns that Greece’s sovereign rating could be further downgraded

The Euro, once touted to rival and overtake the Dollar as the safe haven currency to the world has been having something of a roller coaster ride in the recent past and is for some reason I am not able to fathom climbing against the US Dollar recently. On an average, it moved from 1.43 in January to 1.22 in June and is now in the range of 1.32.

The dollar increasingly will look attractive if the situation worsens, primarily because there seems to be no alternative. The alternatives?

-         The Yen, not with Japan’s current economic position.
-         The Chinese Yuan, too many structural issues.
-         The Pound Sterling, not sure but it has actually weakened against the dollar over the year on an average.

I am no expert on these things but nothing seems to be adding up.

An inside joke but policy makers seem to be in a Chal Daru Peete Hain phase.

30-10-2010 : Satyajit Das on the Europe Financial Stability Fund.

12-09-2010 : Here's a question for you. Let's say that you've borrowed money and are now in a position where anybody looking at your net worth and cash flow position knows that you're almost insolvent. Will the bank lend you some more?

Of course not. That's common sense. Or is it? If, like a big bank or a country you're too big to fail, they will.

This is called government intervention. After all, you can't have Citibank or Greece shutting down can you? So you pile it on.

Don't take my word for it.

Primarily such a move would be due to government pressure. At some level, it would also be returns driven as the spread between the PIGS countries and other EU paper increase. The underlying assumption is that the borrower will not be insolvent. After all, how can an European country go under?

If this isn't Moral Hazard, what is?

06-09-2010 An update from Time Magazine on the Debt Crisis

What effect will a potential default have on the EU? No one knows at this point. It is, however, quite clear that there are disagreements within the member countries on the way forward.

As a German friend put it a couple of months ago, "Maybe system makers should look at the changes required from a Euro re-conversion and get offerings ready!" Alarmist yes, but indicative of the magnitude of the problem? Also yes.

Here is a nice explanation by the NY Times.

1 comment:

  1. Very interesting read. Another bubble waiting to burst?

    With India and China struggling with inflation, wonder whats in store for the world in the coming few months...