End of the Euro

Post by **clv101** » 28 Nov 2011, 11:54

The eurozone really has only days to avoid collapse
http://www.ft.com/cms/s/0/d9a299a8-1760 ... z1ezuLa0gP

Is this really the end?
http://www.economist.com/node/21540255

The rhetoric surrounding Euro collapse seems to be reaching 'fever pitch'. What can happen during the four working weeks before Christmas? This could be one to remember!

DominicJ · Post by **DominicJ** » 28 Nov 2011, 12:07

But, but, but, wat about all those hundreds of articles the BBC/Grauniad did saying the EURO would never collapse, the UK should join and anyone who disagreed is a racist little englander.....

RenewableCandy · Post by **RenewableCandy** » 28 Nov 2011, 12:12

The USA has a huge interest in the disintegration of the Euro, it has been the only other currency big enough to rival theirs. Somehow I think that although the Euro had its natural tensions, it's being "helped aboard its heavenly chariot" by Usonians unknown.

Post by **clv101** » 28 Nov 2011, 12:13

I think it's still unlikely for the Euro to collapse over the next year. I rate it as a high impact, low probability (~10-20%) event.

extractorfan · Post by **extractorfan** » 28 Nov 2011, 12:50

The only institution that can provide immediate relief is the ECB. As the lender of last resort, it must do more to save the banks by offering unlimited liquidity for longer duration against a broader range of collateral. Even if the ECB rejects this logic for governments—wrongly, in our view—large-scale bond-buying is surely now justified by the ECB’s own narrow interpretation of prudent central banking. That is because much looser monetary policy is necessary to stave off recession and deflation in the euro zone. If the ECB is to fulfil its mandate of price stability, it must prevent prices falling. That means cutting short-term rates and embarking on “quantitative easing” (buying government bonds) on a large scale. And since conditions are tightest in the peripheral economies, the ECB will have to buy their bonds disproportionately.

Is the ECB private? Does this mean that if the ECB accepts a "broader range of collateral" that they would likely just own everything in the event of government default?

Is that what this means?

As well as doing more of the same, which seems psychotic to me. Hyperinflation is the name of the game is it not? To keep things in some way affordable.

DominicJ · Post by **DominicJ** » 28 Nov 2011, 13:57

RC
The Fed is currently backing Merkel beyond any point that could be deemed sane....
The idea that they are leading a campaign to sabotage it is laughable, they are following the leader, who just happens to be wrong.

Extractorfan
No central bank is private in any way that.
Even the "private" federal reserve banks pay all of their profits to the US Treasurey and have all of their senior staff appointed by Congress.
The Bank of England is owned by the Government.

In a normal situation, commerical banks borrow from and deposit with central banks and each other all the time.
We are not in normal times, so the central banks have been asking for collateral before giving out loans. Currently, in the US, the FED accepts pretty much anything, whereas the ECB accepts only sovereign bonds (thats not quite true, but its quite long winded to explain why).

Goldman Sachs can exchange an underwater and defaulting loan made to a NINJA for its face value with the Fed, Santander cannot do that with the ECB.

In the US, it doesnt really matters who holds the loan at the time, the US government gets hit with the loss, either the bank fails, and the FDIC is paying out, eventualy reimbursed by the treasury, or the Fed buys the loan, suffers a loss, and the US treasurey reimburses it, all Central Bank Profits AND Losses are passed onto the government.
The the Eurozone, its not quite the same, if Santander fails, all the losses are borne by the Spanish Government, if the loan is passed onto the ECB, and the loan then fails, the ECB bills each national treasurey, Germany for example, receives about 30% of the profits, and suffers 30% of the losses. Profits may be lower, I'm not quite sure how none members work (the UK owns more of the ECB than France, but we havent paid for it yet, and wont unless we join).

Ambrose has been argueing the FED has too *narrow* a mandate, it should have bought* General Moters.

*Not sure if he was serious...

extractorfan · Post by **extractorfan** » 28 Nov 2011, 14:12

DominicJ wrote:
Extractorfan
No central bank is private in any way that.
Even the "private" federal reserve banks pay all of their profits to the US Treasurey and have all of their senior staff appointed by Congress.
The Bank of England is owned by the Government.

In a normal situation, commerical banks borrow from and deposit with central banks and each other all the time.
We are not in normal times, so the central banks have been asking for collateral before giving out loans. Currently, in the US, the FED accepts pretty much anything, whereas the ECB accepts only sovereign bonds (thats not quite true, but its quite long winded to explain why).

Goldman Sachs can exchange an underwater and defaulting loan made to a NINJA for its face value with the Fed, Santander cannot do that with the ECB.

Thanks for taking the time there. So if businesess or countries default then the ECB get money off all the other countries governments?

And all the other governments own a proportion of the collateral.

biffvernon · Post by **biffvernon** » 28 Nov 2011, 14:35

http://www.telegraph.co.uk/news/politic ... warns.html

British embassies in the eurozone have been told to draw up plans to help British expats through the collapse of the single currency, amid new fears for Italy and Spain.

RenewableCandy · Post by **RenewableCandy** » 28 Nov 2011, 15:23

Dom...yes, at the moment. The USA won't want the Euro to implode messily because that would destabilise everything. But in the longer term they'd love it if the EU decided on an orderly shelving of the common currency.

DominicJ · Post by **DominicJ** » 28 Nov 2011, 15:31

Thanks for taking the time there. So if businesess or countries default then the ECB get money off all the other countries governments?

Sort of.
If a central bank, makes a profit , it lends money to a bank, the bank pays it back, with interest the profit goes to the treasurey.
If the central makes a loss, it lends the money, and the money is never paid back, then the treasurey pays out that money to reimburse the central banks loss.

If a Spanish bank defaults on loans to the European Central Bank, then rather than billing the Spanish Government, the ECB bills all of the governments.
Its one of those little quirks that no one involved considered when the ECB was created, because there was never going to be a credit crunch.

RenewableCandy · Post by **RenewableCandy** » 28 Nov 2011, 16:05

It's possible that what you've just described was the "protection mechanism" that I dimly remember someone outlining when I asked "yes but what if one country needs low interest rates but another one doesn't? How can they compensate for that?"

To be fair: it was 20 years ago and I didn't know much about Economics at the time.

snow hope · Post by **snow hope** » 28 Nov 2011, 19:37

The term Euro was coined (scuse the pun) in 1995. The Euro was adopted by 11 countries and the exchange rate set on the 1st January 1999. Greece became the 12th country to join in 2001. The Euro notes and coins came into circulation on the 1st January 2002. Just less than 10 years ago.

I think it likely that we will look back at the Euro and say it lasted a decade....

RenewableCandy · Post by **RenewableCandy** » 28 Nov 2011, 20:05

Ah then I must have been asking about the "Snake", the one that the UK fell out of in 1992, and not the actual Euro. But the same principle holds: how do you equalise the value of a currency held by lots of different economies with their own peaks and troughs...

snow hope · Post by **snow hope** » 28 Nov 2011, 20:27

Yes, RC this was always the problem people forsore. And the fact that it seemed incredulous that the interest rate across the Euro counties could be at the same level. This was bound to (and did) cause benefit to some countries, but prove disasterous to others.

It seems now like the Euro is going to fall apart, unless we have a miraculous turn around by the politicians who to date seem unwilling and incapable of solving this problem over the last lot of months.

The countries who were party to the Euro will either form a smaller block who remain in the Euro or revert to their old currencies, potentially causing a major (if not disasterous) blow to the European Union. Dare I say it, that worst case scenario may even spiral into war.

I hope not.....

So what will this mean to the UK and Sterling? Knock-on effects of a Europe that sinks into depression would be my best bet. That's where we are heading...... time to hope for miracles (but prepare for the worst). It makes sense to have some cash around that is for sure...... and I don't mean Euro notes!!!

Catweazle · Post by **Catweazle** » 29 Nov 2011, 12:49

snow hope wrote: It makes sense to have some cash around that is for sure...... and I don't mean Euro notes!!!

Could you elaborate ? I have felt uneasy having cash for some time and have preferred solid assets. I have recently sold some and am sitting, uncomfortably, on a pile of cash at present. I don't like it, perhaps you could allay my fears.