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Thread: The euro: On the brink of crisis

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    The euro: On the brink of crisis

    The euro: On the brink of crisis
    The governments of the eurozone stand on the brink of their own Lehman moment. The meltdown in Greece has much in common with the storm that eventually toppled the Wall Street bank in autumn 2008. Like Lehman Brothers, the Greek crisis would not normally bother its neighbours – let alone send shockwaves around the world. After all, Greece is a speck in the world economy (contributing 0.5% of global GDP last year, according to figures from Capital Economics); and it is a lightweight in the 16-country eurozone (making up only 3% of the club's GDP). Yet just as Lehman's collapse triggered a final, giant crisis for the entire banking system, so Athens could be the first domino in a chain that brings down Lisbon and even Rome and Madrid. Melodramatic? Just ask Portugal's prime minister, José Sócrates, who yesterday spoke of "a speculative attack on the euro and Portuguese debt" – at the same time as announcing that he would bring forward spending cuts and tax rises pencilled in for 2011. Or speak to Spain's government, which yesterday saw its credit rating downgraded. If a lid is not put on this crisis soon it could boil over into a continent-wide catastrophe.

    Trouble is, containing this situation requires big and decisive action by Angela Merkel, Nicolas Sarkozy and the other leaders of the single-currency club – leadership of a kind that has been sorely missing ever since a little local difficulty was first sighted in Athens months ago. Again, there are parallels with the drama at Lehman, which was greeted by Washington with a concerted bout of hemming and hawing – until it got too late. Larry Summers, who was number two at the US treasury during the great Asian crisis of the late 90s and so knows a thing or too about economic firefighting, coined a golden rule for dealing with meltdowns. When markets overreact, he said, policy must overreact too. In other words: when in a really deep hole, governments have to use every tool at their disposal to get out. To which one might suggest Merkel's Rule: when another member of your gang is in a mess, keep on talking about what you are going to do and meanwhile do absolutely the opposite. She was at it again yesterday, talking about how Greece was going to get its European cavalry any moment now, while at the same time making it clear that Athens should never have been a member of the eurozone in the first place.

    On that last point, Germany is right. Indeed, it is arguable that Greece, Portugal and Italy all have such different economies from their counterparts in the old deutschmark bloc that they should never have been allowed aboard the single-currency boat. But, unless they are about to leave, now is not the time to say that. Now is the time to defend them by backing their sovereign debt with billions of euros, on the grounds that an attack on one member of the gang is an attack on all. That is certainly the way financial markets are seeing it, with senior figures at major banks now talking about how bond investors are "sniffing blood". After the fall of Greece comes Portugal, then Italy – and then?

    This week may mark the eurozone's tipping point: the point when governments lost control and financial markets began calling the shots. That also has parallels with the banking crisis. And the two episodes should be seen as part of a historical continuum, in which banks weighed down by an excess of debt are bailed out by governments who take on that debt – and then have to get bond markets to keep funding them. That is the position in Britain too, which is why the crisis in Europe will form a crucial part of the backdrop for tonight's party leaders' debate on the economy. Gordon Brown, David Cameron and Nick Clegg have struggled to articulate an agenda that is about more than merely doing what financial markets demand. If they want a reason to come up with one, they could do worse than look across the Channel.
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    tankie Military Professional tankie's Avatar
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    Long live the pound .


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    Quote Originally Posted by tankie View Post
    Long live the pound .
    Heh)
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    tankie Military Professional tankie's Avatar
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    Quote Originally Posted by Parihaka View Post
    Heh)

    Heh indeed Pari , i have always been against the euro , unlike crooks who will soon be getting his punt back


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    Administrator Tarek Morgen's Avatar
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    The Crisis in Greece might force Merkel to violate her biggest principle.

    Which would not be to use taxpayer money to save another nation form it's own corruption.

    Neither would it be the increase of the deficit this would cause

    Nor would it be to act against the will of the people who at the moment oppose bailing out greece.

    No, she might have to break with her iron rule and actually have to do something.

    Her biggest problems are the ones that don't disappear (at least from the press) when they are ignored long enough.

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    Here is Economist's POV.




    On the edge of the abyss
    Europe's leaders must act fast to stop Greece’s market contagion spreading

    Apr 28th 2010 | From The Economist online

    IF A sense of panic has started to grip Europe over the potential for Greece to default on its debts, and the contagion to spread rapidly to the continent’s other struggling economies, it has not yet struck Herman Van Rompuy, the president of the European Council. He insisted on Wednesday April 28th that there was “no question” of Greece's debts being restructured. He also said leaders of the euro-zone countries would meet next month to consider how to activate their proposed joint lending programme with the IMF to support Greece. Jean-Claude Trichet, president of the European Central Bank, delivered an almost identical message, saying that a Greek default was “out of the question”.

    The calm demeanour of Mr Trichet and Mr Van Rompuy is not shared by the markets. On Wednesday Greece said that it would ban the short-selling of shares for two months to prevent speculators doing further damage to the country’s banks. The previous day, shares in Greek banks had plunged by nearly 10% and the Athens stockmarket as a whole fell by 6% on fears that the country would soon suffer another downgrade of its debts. Those fears proved entirely justified. After the markets closed Standard & Poor’s heaped indignity on Greece by cutting the rating of its sovereign bonds to “junk” status. It also cut Greece's banks to “junk” because of their hefty exposure to government debt.
    The markets still see the risk of a Greek default as high

    Although the move to ban short-selling steadied Greece's stockmarket somewhat on Wednesday, the chances of the country defaulting on its debts were still perceived by the bond markets as high. Spreads on Greek government bonds (the risk premium compared with German bonds) reached a 13-year high as investors worried that the proposed rescue plan for Greece could stall. Talks between Greece, the European Union and the IMF got under way last week.

    Greece was initially seeking up to €45 billion ($60 billion) in emergency loans from euro-zone governments and the IMF this year, the first chunk of which will be needed by May 19th, when the Greek government must refinance a €8.5 billion bond. But as the crisis has worsened it has become clear that Greece could need much more. On Wednesday it was reported that the EU and IMF were preparing a package worth up to €120 billion over three years—if so, the biggest sovereign rescue yet attempted. Nevertheless, even aid on this scale might only postpone an eventual default, if Greece's economy fails to grow faster than its debt pile.

    Investors do not seem convinced that euro-zone governments will be able to muster the political will to hammer out an agreement. Germany, as the largest euro member, is vital to any effort to save Greece, but it is wavering. German public opinion is firmly set against dipping into the public purse to help the profligate Greeks. Angela Merkel, Germany’s chancellor, is in a tight spot. If she agrees to extend aid quickly to Greece a voters’ backlash back home may send her party crashing to defeat in regional elections set for May 9th. But if she sits back and watches Greece slide towards default, the contagion is sure to spread rapidly to other, bigger EU countries with debt problems—Mrs Merkel could then end up being blamed for triggering a far worse conflagration across Europe, including a fresh banking crisis.
    Portugal is touted as the next European country at risk

    Fears that Greece's fiscal crunch would spread to other euro-area countries have sent the region’s single currency reeling to a one-year low against the dollar. S&P's decision on Tuesday also to downgrade the debt of Portugal by a couple of notches pushed European and world stockmarkets lower. Portugal, despite a smaller budget deficit and lower public debt than Greece, is widely touted as the next European country that may suffer a sovereign-debt crisis. Portugal's slow-growing economy, drastic loss of competitiveness and high public and private indebtedness are all weaknesses that markets might put to greater test.

    If Portugal comes under intense pressure, contagion might then spread to Ireland, Italy or Spain, the other euro-area countries with some mixture of big budget deficits, poor growth prospects and high debts. Only swift and decisive action by the leaders of Europe's big economies is likely to head off the current crisis. Default by a smaller member such as Greece would be a body blow to the euro's standing but it need not spell the end of the currency. However, that might not be the case if the problems spread further afield.
    Greece's debt crisis: On the edge of the abyss | The Economist
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    An t-aimiréal chléthúil Senior Contributor crooks's Avatar
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    Quote Originally Posted by tankie View Post
    Heh indeed Pari , i have always been against the euro , unlike crooks who will soon be getting his punt back
    You've certainly got it right that I'm pro-Euro, me old mucker, and I think we'll weather it - Merkel needs to show leadership here, Germany has to lead the way to an agreement with Greece, electoral interests aside, this is the European economy we're talking about, longterm Merkel knows which is more important.

    It's make or break time, everyone inside wants it to continue, so I don't think we should let a good thing fold.
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    Europe's looking at a long term recession and it's going to hurt the rest of the world. I heard exports in the USA are up 17 percent but flat to Europe. I'd imagine it's the same for anyone else doing business there. Greece, Spain and Portugal should of never been allowed in. I heard something about Goldman helping hide greek debt to cook their books...maybe they are the giant squid on the face of the world. So much for all that talk about the Euro replacing the dollar.

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    Quote Originally Posted by Roosveltrepub View Post
    Europe's looking at a long term recession and it's going to hurt the rest of the world.
    Just wait til the Chinese bubble pops.

    (oops, let the cat out of the bag)

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    Quote Originally Posted by crooks View Post
    You've certainly got it right that I'm pro-Euro, me old mucker, and I think we'll weather it - Merkel needs to show leadership here, Germany has to lead the way to an agreement with Greece, electoral interests aside, this is the European economy we're talking about, longterm Merkel knows which is more important.

    It's make or break time, everyone inside wants it to continue, so I don't think we should let a good thing fold.
    Germany does not have enough money to bail out all the PIGS nations, it's that simple. Long term, Germany needs to stay out. It can't afford to rescue other European countries.

    Greece is just he first leg. Spain's economic fundamentals are even worse than Greece in many ways. Portugal will get hit as soon as the investment banks finish burying Greece.

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    Why not just go back to the former currencies, Its been less than a decade, Keep the borders and free trade stuff in place. Let those countries with weak financials caused by their governments fix them.

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    Official Thread Jacker Senior Contributor gunnut's Avatar
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    Quote Originally Posted by Maxor View Post
    Why not just go back to the former currencies, Its been less than a decade, Keep the borders and free trade stuff in place. Let those countries with weak financials caused by their governments fix them.
    But that's not what the French want. They (the technocrats of France) want to establish a United States of Europe to compete with the USA. Germany was suckered into it. Anyone noticed that France is not leading the rescue effort of Greece? Germany is. I wonder why?
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    An t-aimiréal chléthúil Senior Contributor crooks's Avatar
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    Reversing back to the Punt/Deutschmark/Franc would bring back the bueurocracy and exchange rate headaches, proper free trade as an internal European Market only really took off with the Euro's arrival.

    My prefered policy is to lay out conditions to weak countries (including my own) within a reasonable timeframe (to show the markets there's action) on fixing the fiscal imbalances we've created, and failure to correct means ejection from the Eurozone.

    The weakness of some doesn't mean the Euro should collapse, it's established itself as a solid, tradable world currency, and has been a positive development for the countries involved.
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    Senior Contributor BenRoethig's Avatar
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    Exchange rates might seem like minor headaches if Italy and the the two Iberian peninsula nations have a similar crisis.
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    An t-aimiréal chléthúil Senior Contributor crooks's Avatar
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    Quote Originally Posted by BenRoethig View Post
    Exchange rates might seem like minor headaches if Italy and the the two Iberian peninsula nations have a similar crisis.
    It's not just exchange rates though, internal trade, that has increased under the Euro, as well as access to larger, new markets for Irish firms at a competitive margin.

    The fact that whereas Ireland's currency mightn't be worth the paper it's printed on right now, we're in a much larger currency bloc that ensures whatever else the flow of cash is secure, if stagnant, but even then the stagnance is our fault for being so fiscally f**ked and property reliant.

    The Euro has many benefits to members, and despite the strong movements for leaving that are starting to crawl out from under the rocks, we're better off inside (and I'm a Eurocritic and Isolationist on most EU matters).

    You're absolutely right about the problems the crisis spreading, they could obliterate the Euro, but that's why it's important the wonks are focused and conditions are laid out for continuing Eurozone membership, not a compelling reason to abandon it.
    Last edited by crooks; 09 May 10, at 18:51.
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