Thursday, April 29, 2010

Europe's Price Tag

Price tag of solving Europe keeps going up and up and up. On the way to the superbubble that eventually ends civilization if they actually do this. (actually the fate may have already been sealed without them doing this) This is nothing different than what started WWII with all the cross guarantees of defense. Poland has a pact with Hungary and England has a pack with Poland and France has a pact with England. So if Hungary is attacked everyone declares war on everyone else. Except now you have financial bailout pacts.

This is from Bloomberg yesterday.

European policy makers may need to provide as much as 600 billion euros ($794 billion) in aid or buy government bonds if they are to stamp out the region’s spreading fiscal crisis, said economists at Goldman Sachs Group Inc., JPMorgan Chase & Co. and Royal Bank of Scotland Group Plc.


With Greece’s budget turmoil infecting markets from Rome to Madrid, economists are urging German Chancellor Angela Merkel, European Central Bank President Jean-Claude Trichet and other officials to come up with unprecedented measures. Other steps could see governments guaranteeing bonds and the ECB abandoning collateral rules or reviving unlimited lending to banks, the economists said.


The extra yield that investors demand to hold Portuguese 10-year bonds over bunds rose 59 basis points to 277 points yesterday, the most since 1997, before slipping 3 points today. The spread on Spanish debt increased to the most in more than a year yesterday and the spread on the bonds of Italy, the euro region’s third-largest economy, was the highest since July. The premium on Greek bonds surpassed 8 percentage points.

“This is like Ebola,” Organization for Economic Cooperation and Development Secretary General Gurria told Bloomberg Television today. “It’s threatening the stability of the financial system.” The World Health Organization calls Ebola “one of the most virulent viral diseases known to humankind.”

Heck yeah, the virus is a perfect comparison because the financial system is so dang interconnected that someone like Greece who shouldn't matter at all holds the world hostage. So the fact we are too interconnected means the solution is to become more interconnected. Now that is Harvard like genius at its best right there.


Justin said...

The problem though, is this - what are the alternatives?

Unless Germany and France are prepared to see 30 years of hard work unravel, they cannot just stand idly by while Greece implodes and brings down the Euro with it, with the EU possibly next.

Don't forget that Germany (espcially) and France reaped huge rewards from the Euro - you now had all these once puny little Mediterranean countries importing like crazy with their new fancy (highly-valuable) currency. This benefited the German export machine and France to a lesset extent.

The strength of the German economy has largely been built on the back of allowing the Euro nations to use the Euro to buy German goods and services. This is a massive advantage which I can't see Germany letting go. And the same applies to France.

However, it's becoming clear that the problem is spreading (as you point out) and unmanageble. Eventually the whole house of cards must collapse, but that could be many many years away. In the interim it's more likely that we will see a stage-managed Greek default (kind of like a pre-packaged bankruptcy) where the banks/pension funds and other bondholders take some sort of a haircut in return for an even greater EU-backed long-term bailout package. I think...

It's hard to say really, we are in unchartered waters here.

Market Seer said...

Just responded in the post above. The entire monetary system is very poorly put togther. You say 30 years of hard work but it is 30 years of trying to build a mansion and instead the end result was a room thatch hut. The whole thing is shoddy and was never going to last. This is the first little test (Greece is just 2% of the Eurozone economy) and the whole thing is about to collapse.

So your holding onto something that isn't going to work with the outcome of the bust being that much larger.

Justin said...

Well I'm sure it was 30 years fo hard work, even if the outcome was just a shoddy little shack that fell down at the first little breeze :-)

Certainly Greece is stuffed (and probably the Euro), it's just a matter of when. I figure they will try and hold the line for the next couple of years.