Thursday, September 01, 2011

New Month, New Euro Break-up Talk.

A new month has brought on renewed thoughts of Euro break-ups. We have been asked in our comments column what we think and rather than just replying in the comments column and having nothing else to say today, we thought we would make a post of it. Most of what we feel we have expressed before but to recap -  

TMM think, like most, that this is now a political problem requiring political solutions but one must bear in mind that the whole Euro project is the politicians most precious baby with so much dependant politically on its success. The clues we have had from previous high ranking statements are along the lines that they would do "EVERYTHING" (and read "anything" within that) to protect their baby. TMM suggested sometime back that this could include short selling bans and though comments pointed out this would be useless, they have indeed embarked upon direct controls, even though the market sees them as futile. The big difference between this sovereign crisis and the banking crisis is that the sovereigns are in charge of the rules and can change them to suit themselves (as we have seen throughout the unwinding of the Euro dream). The debate should be just how "Gadaffi" the Eurocrats go in defending what they see as theirs. They may well end up holed up in Brussels (like Sirte) denying the obvious and fighting to the death.  

If there is to be a Euro break up we see it coming not from the ejection of the PIGS by the core but by "voluntary" resignation by individual countries, much in line with the "decided to spend more time with their families" resignations we see in our world. But this is all a long way off, for as many point out it would be short term disastrous for any indebted nation to step out from under the umbrella of European protection they are currently enjoying during this storm. More likely is the pressure from the core on the periphery to "do something" will increase to the point where the periphery nation has a stark choice. Do what the Eurocrats demand or voluntarily walk the plank. A tough call, when the cutlasses of the Eurocrats are being sharpened but the periphery can see the sharks below.

The real problem is social strife. The tightrope of acceptability in the relevant countries is the riot line, but of course the locals, instead of smashing up their own countries in anger, should go to Brussels and Frankfurt and protest there. TMM have long expected farmers from the periphery to take their muck spreaders North for a day out of graffiti  work. We suppose one extreme action that may "focus the minds" would be for the whole populations of the periphery to move into Germany, pitch camp and build homes in their countryside and claim minority rights.

In the short term the ECB have actually been very effective at controlling the speculators main tool of attack by shutting out the periphery debt from play. The CDS market is left for the speculators to beat up on but we think that CDS is a mugs game and really should not be cited as a true example of reality. TMM feel that this attack by the market will be repelled only to be fought again another day.


P.S. TMM have just seen the light - There IS an answer and it lies neither with the politicians, nor with the central bankers. It's simple. Just call in the Human Resources department! They ALWAYS know the best way to arrange a "voluntary" redundancy.

P.P.S. What ever happened to their proper titles of "Staff Department" or even "Personnel"? And who in God's name ever allowed them to wield more power than the business managers they are meant to represent?


MoreLiver said...

Excellent work, TMM. I'm loaning the term "going Gadaffi". All I've come up with are "PIIGS-hit", "Europe's Fall" (Arab Spring) and "Bathtub" (means many things)

Skippy said...

Given the macro newsflow (and tail risk) in Europe the euro is defying gravity in my humble opinion. I know that the alternative has a very dovish central bank, but the risk still seems skewed. I guess it has simply been the bid from the central banks in this part of the world.

On that score, I did hear yesterday that at least one large member of the FX piss taking community was pondering whether it was a such a great idea to continue buying eurodollar.

By maintaining the value of the euro (above what it probably should be) China is clearly not helping countries that need a more competitive exchange rate.

MoreLiver said...

Skippy, I disagree. One alternative, and very viable scenario is that after several exits on the periphery, what remains of the "Euro area" is very hardcore.

Secret--Sauce said...

What about the middle ground? Sacrifice the PIG (port/ire/gre) to save Spain and Italy and thus a more perfect union.

CDS punters might want to pull out that old ISDA master agreement. I seem to remember some language about reference entity restructuring that improves credit quality is not a credit event.

Hmmm. Surely a little Piggie free of the euro and EU shackles is more creditworthy. Time to sell protection?

charles said...

I am not with you on this. There can be no big social strife in peripheral countries simply because it is too easy for the governments to cheat, thanks to a structural inability to enforce decisions and monitoring at a "federal" level.
As a consequence, public accounts become a charade, turdy assets can be brought to ELA and golden rules are empty promises.
The only possible resignations are the countries from the core, as they realize that they are powerless to stop the cheating. This is exactly what Hans-Olaf Henkel proposed in the FT a few days ago.

CV said...

Amazing this, most people I know who work or have worked in a big financial institution are really serious about their gripe towards the HR department ...

I guess there is something to it after all ...

i.e ...

Head of N/A: "We found this smart guy/gal with great experience in doing our kind of business. We would like to get him/her in our team."

HR: "Is he/she from Oxbridge"

Head of N/A: "Oxfarm?! No, it is a serious candidate"

HR: Oxford or Cambridge?

Head of N/A: "No"

HR: Ah, sorry, we cant hire candidates from lesser standard universities, but we do have a great candidate for you, Xing XingXing from China who scored 100/100 in all the technical aptitude tests we gave him. I will send him down.



Polemic said...

CV- yup, correct. Rings more bells than Quasimodo in the bell testing department of "big bob's bell foundry, we have more bells than you can shake a clapper at"

Charles, I just can t see the core abandoning their runty baby to the periphery, even if they do give birth to a prettier one.

SirArthur said...

Your argument seems to be that there is too much to lose to allow a Euro breakup.

My argument is that there is going to be no choice about this or control over how it happens unless the ECB or the EFSF (now questionable with the upcoming German court ruling) continue to fund the over 5% club.

The ECB could of course buy all paper issued by Italy or Spain, but without the political will of it's guarantors, I can't see this happening.

A serious whiff of Euro breakup will cause chaos as lenders to cross border banks and sovereigns begin to wonder what currency they may get back, and stop lending as a result.

These lenders include ordinary bank depositors.

Of course ordinary savers looking for a return could start to buy bonds in the over 5% club as part of the hunt for yield (Italy is very unlikely to default) but this happy ending will not occur while people suspect they may receive Lire in return, 10 years down the road.

@CV haha - so very true

SirArthur said...

PS I. Hate this expession but isn't the Euro experiencing a Wile E Coyote moment ?

Everyone having figured out there's a serious problem ("Houston...") except the PBOC and petroCBs ??

Leftback said...

Sir Arthur,

The fact that EURUSD hasn't plummeted has a lot to do with the fact that we haven't got around to the point where we see a fatal yield spike in one of the big countries (Italy, Spain) yet, and to a variety of perceptions/misperceptions.

First of all, the market perceives that the Fed will QEase and print endlessly for the rest of the decade. This may yet prove to be false.

The converse, that the ECB will not print and QEase, is also a widely held view. If one accepts this to be true, it means the market thinks that the worst of the PIIGS will be ejected, rather than bailed by printing, and this will result in a strong/er Euro (see MoreLiver's point, and Secret Sauce, above).

As many observers have pointed out here, the stress in the system arises because there are at least three notional Euros, the German Euro worth $2.00, the French Euro worth $1.40 and the Greek euro worth about.... well, one drachma. About 25c?

Charles Butler said...

Charles - if I recall (FT has locked me out), Henkel's proposal threw France and Belgium to the swine. A tactful manner of suggesting that Germany withdraw from the EMU, really.

The problem with this plan is that the nations relegated provide about 60 percent of Germany's 2010 trade surplus. If you then try and imagine a currency adjustment that would return France to EZ competitiveness, and how much that would boost the economies that have held their own (Italy), and those that continue to increase their export share (Spain)... well, you have to wonder what Germany would be left with when all is said and done.

No amount of stomping about on the moral high ground changes the fact that there is no solution here that doesn't have the winner paying.

Leftback said...

Germany cannot possibly leave the Euro here, due to the fact that the reintroduced DM would then be $2.00 and €2.00, with the result that nobody would want to buy German exports. So that idea is out.

OTOH, I did just find some DM in my briefcase. Might be quite handy...

Leftback said...

More troubling data on European banks:

Slow motion bank run?

Kredit Anstalt moment? Hmm... I am about to visit Vienna....??

Polemic said...

Bank recapitalisation has to be part of the "do anything". I cannot believe they will let bank liquidity dry up intra-Europe. If they think they can buy all of italy and spain's debt then lending a few euros to their own banks is easy. The french let soc gen or ca or bnpp go? They'd sell Champagne to the Chinese first (and I mean the region). Sur votre bicyclette Jean!

Charles Butler said...

LB ---

What I see at that link is a guy calling EZ bank deposits flatlined at 100 a 'bank run'.

Charles Butler said...

Matter of fact, seeing that MFI withdrawals and non-MFI deposits kinda square I think I can make an equally stupid argument that it represents the repatriation of euros.

Or maybe he just forgot to include public administrations in the calculation.

Anonymous said...

'C from C'
says' Charle B ..."winner paying",
precisely. It is only a question of how and when. Bail out via the bailout mechanism now ,or pay later viam the economic consequences that will arise post breakup. Perhaps the sooner that message get's home the sooner we can dispense wit the chest beating and move on.

charles said...

@CV&Leftback&Charles Butler
Thank you for your observations, but let me be more explicit on the mechanism.

I don't think we are going to see new bank notes, if only because the Article 3.4 of the euro treaty says that the currency is the euro. It won't be even called a currency. Consider it as an accounting unit, in the same way of what the nominal of a CPI index bond is, except that the indexation doesn't come from a basket of prices but from the Bundesbank in its full discretion. Just express German salaries in this accounting unit and German voters will feel protected from inflation and be happy. As nominal wealth is as unevenly distributed in Germany as elsewhere, you don't need to offer the same conversion to all holders of euro-denominated assets to keep the votes; just the most basic domestic savings account, and up to a limited amount is enough. That will increase German govt Debt, but I assume it will be easier to sell politically than transfering to Greeks. Beside, this new liability will have a very low interest rate. I understand that big German savers suffer the injury of losses there ; as Charles Butler mentions, there are no ways to avoid them. But at least this solution doesn't add the insult of the German worker and taxpayer paying to guarantee the real value of Voldemort's Bund holdings.

Add to that a requirement that accounting unit denominated assets & liabilities can only be held by resident so that the Neuro cannot be bought by macromen (so it won't jump to 2$) and the trick is complete (and the Bundesbank is renamed Voldemort junior!).
As their legacy liabilities stay denominated in the "Euromed" German industries don't take the full blow of deflation on their balance sheet, only the workforce cost goes higher. They only loose the export market from the customers who do not have the ability to pay in real terms. They were fake anyway.

As a consequence, Voldemort is super-p... off now that it now holds euro that are worth 1$ which is itself a weak currency, until it realizes that is can accomplish the same trick with full dollarization of the yuan denominated assets ;-) !

Charles Butler said...

Brilliant, Charles (no B). The local currency solution writ large.

The German homies are happy because things have returned to their rightful order;

The local wealthy can't squeal in the face of the two above features;

and, most importantly

VM, whose unalterable destiny it is to return the winnings, is forced to do it through the EZ current account, rather than the capital. Way better - at least on this end.

Utopia reduced to this...

ntwsc said...

With regard to your PSes, Pol, the first few times I heard the term I thought it must be an innovative organ collection bank.

Polemic said...

Actually i think Charles non-B should be packed up and dropped by parachute into Frankfurt. Nice one Sir.
A completely unmanipulatable currency apart from by those in charge of it. But, excuse my lack of understanding but would there be a problem at the interface between what the german public are told there salary is worth in Neuros ( love the term) and what they actually receive in their hands to go shopping with which I assume is Oeuros ( old Euros)? actually i think i see it .. they won't care as we assume the Neuros they are accountingly paid in will always be worth more than the Oeuros they are given. That right?

Ntwsc - I know I'm tired but you've lost me on that cunning reference.. Please enlighten and show me up for the dullard i am ..

Moreliver - borrow away you can have it .. I spelt it wrong anyway. hes a double d single f .. sorry

ntwsc said...

Dunno why you worry so much about spelling anyway, ever since the Spring the press have resorted to using a Q.

Human resources I think is what I was talking about, but then again I've also lost the plot.
I've had to skip over trying to register unmanipulatable for this evening ;)

charles said...


You are not only right, but the shops would also display the prices in Neuros even if the payments were in OEuros. It would be similar to what happened in Russia in the 90's where prices where displayed in "Equivalent hard currency unit" (a strange beast that was equal to 1 USD when euro was below one dollar and became 1 EUR when it went above !) but settlement occurred in Rouble.

May be the Oeuro should be named the "Eurouble" as Stephen King from HSBC alluded recently ( ) ?

This way, for the October post about euro break-up , we will have the terminology ready...