Senate Euro Crisis

A thread for discussing the challenges faced by the common currency in general including but beyond the Greek debt crisis. The British pound has been climbing almost steadily against the Euro since the beginning of 2009. The USD has hit a decade plus high against the Euro.

Austria has been getting a lot of attention in the last few days, with its own Detroit style financial crisis:

A friend of mine works for Heta. Interestingly the word the Germans use for bad banks set up to take on the bad assets of struggling banks after the global financial crisis is also "Bad Bank."

Hypo Alpe Adria is an outsize financial disaster for a province of half a million people.

 

It would be entertaining to see the Germans try to impose Greek style austerity measures on Austria.

 

I'm no fan of the UK Labour Party - in fact if I could vote here I'd probably vote Tory - but one of the few good things the last Labour govt did was to keep Britain out of the euro. I still think we will see at least Greece eventually leave.

 

The heart of the Hypo Alpe Adria crisis, apparently, is that Pfandbriefe (covered bonds) are explicitly exempt from bail-in measures in the course of a bank resolution.

I think I need Ender Sai to explain this to me.

Ok, I'll start by resorting to The Economist:

So, no bail-ins (debt writedowns?) for covered bonds? Is that what we're talking about with Heta/Hypo Alpe Adria? Teach me, Ender Sai.

 

The Euro's gonna get worse. Poland was screwed by the CHF debacle (Hungary... saved!).

 

Are Eu sure about that?

 

The Euro was flawed from the start. Having a monetary union without a strong political one was a recipe for disaster, and now it's playing out.

The result? A race to zero, for all major currencies.

Why pay back your debts when you can inflate them into oblivion? The question becomes, 'what happens when central banks try to unwind all that debt?'

The US got away with that for one simple reason: the dollar is the reserve currency. The Euro is not, and is at risk of imploding. I doubt Mr. Draghi will allow that to happen, but it does make one wonder at what point people lose faith in the paper money system, especially with bitcoin and the like popping up.

One place to watch is China. Beijing has been quietly buying up huge amounts of gold, as well as encouraging its citizens to follow suit. There are some who believe that they may try to back the yuan with it, which would be instantly catastrophic to all other currencies and likely spark retaliatory moves. It's all speculation, but with both China and Russia setting up dollar-exclusion zones around the globe, one has to wonder what their next moves are, and how it will, amongst other things, the Euro.

Peace,

V-03

 

The big picture is that the U.S. and the EU are increasingly no longer the biggest and most influential markets, whether you're talking about commodities, manufacturing or consumption. The epicenter of the global financial system is shifting away from NY and London. North Sea oil is nearly gone. The U.S. is riding an energy boom that in the end will not keep it from continuing to be a net importer of oil although in the long term, the U.S. will be priced out of the market for foreign oil and will have to reduce its consumption accordingly.

 

Why would an export-driven economy want to trigger currency crises in all its major buyers?

 

Jabba, shale oil estimates have at least a century's worth at current consumption levels, so I'm not really sure how America becomes a net importer again. I think it's also worth mentioning that work on renewals will continue to progress, so that at some point, hopefully, the US and Europe won't be petroleum-based economies. I don't know what the major replacement will be, but I'm leaning towards dominance of hydrogen, with solar and wind thrown in for good measure.

If we can figure out to build sustainable graphene batteries, then the whole picture gets turned on its head.

Take home point: there are simply too many unknowns to predict the energy landscape. A decade ago, it was 'Peak Oil', and then came fracking, which continues to unlock larger-and-larger supplies of oil. Eventually, it's going to run out, but I'm hopeful that we will innovate ourselves in another direction before then.

In terms of a currency crisis, in the short-term, they wouldn't, but if the US becomes weak enough, gold-backing the yuan would likely destroy the dollar for good, at least in its current form. China's not a free country; they can set whatever exchange rate they like. Yes, it would hurt exports, but it would also attract enormous amounts of capital. Money flows where it's treated best, and if the piling into the Swiss franc (before it's brief pegging to the Euro) is any indication, a stronger yuan would like become dominant.

I agree it's not likely, but it's possible, and the US and Europe should prepare for it.

 

We're still a net crude oil/condensate importer right? We peaked at 13,4 million barrels/day of imports in 2006 and have dropped to 4.8 million as of the end of 2014. The trendline suggests we would be a next exporter by 2020, but I'd bet that never comes to pass.

In the meantime, I credit the rapid expansion of energy production for a lot of the U.S. economic strength relative to Europe. It's not all about monetary policy/asset purchase program.

 

I was hoping this would be about the Greek government trolling Germany by demanding more WWII reparations.

 

A bail-in just involves forgiving some or all of a debt, rather than lending more money to a sovereign state or servicing that debt for them. The issue with it is that it can scare off investors who are trading a forfeiture of future earnings through ROI for a carryable tax loss. As with any debt relief mechanism, in other words, it's imperfect. But the Economist is arguing long term the losses are less and slightly more contained for bail ins than bail outs.

The question that Eurobankers have to resolve is how they keep their bonds attractive if they carry that contingent liability.

 

Isn't there a EU parliament that's elected by voters? How does that fit into this?

 

It doesn't. It has a nuclear option where the Commission is concerned, but that's about it. The EU suffers from a democratic deficit, but if it were to be remedied it'd likely be at the cost of weakening the Council of Ministers and they won't vote for that. The EU is the way it is because the member states' executives like it that way.

 

The Euro won't survive long term without a fiscal union... meaning we will either see a continued crisis, the end of the Euro or an essentially federated Europe.

 

Which one do you think is more likely?

 

Frankly the EU should never have expanded into Eastern Europe or Turkey. It would have best been restricted to the signatories of the Maastricht treaty as at 1986 - UK, Spain, Greece, Portugal, Ireland, Denmark, Germany, Nederlands, the BeNeLux bloc, and Italy. Optional membership for Sweden and Norway should have been considered, but it should have staunchly remained a Western European institution.

 

But... it's essentially Greece, Spain, and Italy causing the majority of the current issues, no?

There were other issues with CHF around the Eastern bloc nations, primarily because CHF was hard-pegged to EUR I thought, so everyone did loans in CHF.

 

It is but the size and 'market capitalisation' of the Euro greatly impede the capacity of the EU to fix its own problems.