Monday, 29 August 2011

End game for the Eurozone

As I have pointed out before putting together two separate pieces from even the same newspaper can yield some interesting results. 

Euro bail-out in doubt as hysteria sweeps Germany was the page 1 headline on today's business DT. The article catalogues the likely disintegration of Dr Frau Merkel's coalition government with smaller parties and even members of Merkel's own CDU party very unhappy with Germany having to pay such huge sums to bail out the PIGS. They are even more unhappy with their complete lack of democratic control over the EU and ECB.

The article ends, 'The next month will decide her (Merkel's) future, Germany's destiny and the fate of monetary union.' That really says it all!

The real seriousness of the situation emerges on reading Tim Congdon's  piece also in the today's business DT entitled, "Britain can easily weather a eurozone break-up if it lays off its lenders". As always Tim is concerned with the strength of bank's balance sheets in current circumstances, the break up of the Eurozone and the resulting sovereign debt defaults which could leave many banks in the EU bust.

Sovereign debt is the ultimate asset underpinning our banking system. A sovereign default is very serious but it can be managed as happened with the huge Russian debt default of 1998 involving 168$bn of debt. It never made the headlines which was probably a good thing but was potentially very serious for the UK through the activities of the LTCM hedge fund. You probably never heard of it because the major investment banks got together and 'fixed' it but boy it could have been catastrophic.

In fact between 1998 and 2005: Russia, Ukraine, Pakistan, Ecuador, Argentina, Moldova, and Uruguay. all defaulted and the world continued to function. These countries devalued, cut public spending had their debt restructured and followed the IMF prescription which works.

So what is different today? Well the banks are not what they were and politicians desperately seeking re-election are involved and have taken things out of the bank's hands. Now I am no fan of rapacious bankers but they are generally talented people who do understand banking. Politicians on the other hand as Napoleon observed are generally of low intellect and understand very little about anything except their own self interest. This is what is behind Tim's plea to lay off the banks. Be assured our politicians and EU crats won't! They cannot resist meddling. There will be endless conferences, announced plans media appearances and sound bites. Just what politicians love.

This is what makes the current Eurozone situation really dangerous. We have a bunch of unreconstructed Soviet style apparatchiks like Barroso in charge of a capitalist system in deep trouble. I expect a full blown financial crisis by mid September with a huge amount of hot air from Brussels.


Barrymx5 said...

I very much agree with the analysis of politicians - especially those in the EU (a few honourable exceptions amongst those who are trying to get out of the EU Soviet). But I am no longer convinced, after 2008, that bankers know what they are doing either. That is the really scary bit.

Eric Edmond said...

Bankers understand banking. They of course act in their own interests which unlike politicians are reasonably transparent. So I would say they largely know what they are doing and act rationally by their dubious moral code unlike politicians who act irrationally and have no moral code or should that be compass.