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Monday, June 20, 2011

Why does the Euro 'have to' survive ?

Systemic failures don't survive. At least not forever.

by StFerdIII

 The mighty ZEuro. One wrong assumption behind the Euro and its 40% appreciation over the U$ is that Germany, Holland and France are in relatively good economic shape, and that the British though they are outside of the Euro-zone, are so tied into the economic fortunes of the Continent, that they will 'bail out' the water from the sinking ship of state. None of this true. Neither are the details behind the second assumption that Greece, Portual and Ireland, all of whom are technically bankrupt are 'small', and that Spain and Italy are in much better shape and should avoid the debt 'contagion'. There is little to support this ideal.

All of the EU is bankrupt. The fun should start in 2013 when many countries have to roll over their debt. The straightjacket of the Euro and its unnatural currency area militates against reforms, fiscal reductions, tax competition, and the natural process of allowing banks and states to go bankrupt in a controlled fashion which is going to be an inevitability. The Euro is a gigantic rope cemented with a massive Gordian knot which denies not only cutting, but rationalization, and local responses to local conditions. It is as if 25 short men were stacked head on head to fit inside a huge statue, locked, barred and with no key. They would all die together. So it goes with the Zeuro zone. There is no reason why the Dutch need to be paying off Greek profligacy. None whatsoever. Bankrutpcy can be contained, be it inside the banking sector or with governments. In Europe of course the banking system and the governments are all interwined. There is no division between the two.



France and Germany


Total Debt

$19 Trillion in U$

$8.9 Trillion


Economic Size

$16.2 Trillion in U$

$4.4 Trillion


Financial System Debt outstanding

$5.6 Trillion

$2.24 Trillion [German, French banks]


Sources ECB, Euromoney

Note: Debt is just the "External debt" which is defined as the total public and private debt owed to nonresidents repayable in foreign currency, goods, or services. True Debts including domestic debts from government to residents would add another $5 Trillion to the debt level.

France and Germany are roughly one-third of the EU's economic size. Yet they have close to 50% of the EU's total debt load, and have bank risks totalling well over $2 Trillion in exposure just to EU nation states. There is roughly another $1.5 Trillion in sovereign debt exposure in Eastern Europe for French and German banks not counted in the above table. In short, the two 'engines of Europe' do not have the economic power, nor the available leverage to bail out Greece, Spain, Ireland, Italy and European banks. France and Germany are not in good economic shape, any analysis which makes the opposite conclusion is simply wrong.

Even if France and Germany were debt free they cannot afford the periphery. Portugal, Ireland, Greece and Spain are in sorry economic shape. There really is no cure except bankruptcy for these states. In aggregate they have $1.6 Trillion in debts owed just to the major European banks. Bailing out Greece for example, is really about bailing out French and German banks – this is the political imperative for the German and French leaders:

"The Bank for International Settlements (BIS) has provided a breakdown of Eurozone banks' exposure to Spain, Greece, Portugal, and Ireland. In total, entities in the four troubled nations owe 1.6 trillion euros to Eurozone banks. French banks are owed 493 billion euros.German banks are owed 465 billion euros. Thus French and German banks amount to 61% of exposure.” and

....Spanish, Portuguese and Greek debt outstanding. UK and continental European banks are the most exposed to the three countries, accounting for 92% of total foreign bank exposure to public and private sector borrowers, of which around 20% is government debt, or $265 billion. Within that, German and French banks account for almost half the total bank exposure, according to BCA Research. Government debt is about 8% of the European banking sector’s asset base and in some cases more, notes JPMorgan. In some countries, such as Greece and Spain, that level has risen significantly since the ECB introduced special liquidity schemes in the wake of the banking crisis.”

The reason why the Euro can't be saved is that it is a totally unnatural currency area and the systemic government-bank debt and failures within Europe make endless bailouts an impossibility. The day of reckoning can be delayed, but the true state of the EU; low structural economic growth; high unemployment rates; moribund and fatally flawed welfare programs; high unionization rates; huge off the balance sheet debts for pensions and health-care.....all of this and more means that the EU system will crash at some point in time. In that regard a Euro with a 40% premium over the U$ or sounder national currencies like the Aussie or Canadian dollar is simply preposterous. Market manipulations, like bad currency areas, eventually end as well.


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