One More Spin Through the Euro Cycle
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  • Otiose8

    The gloomy times not to mention gloomy events are inevitable. People are just naturally reluctant to face up to what’s coming. The delay will only make the necessary adjustments worse unfortunately.

    Debts need to be written off, losses absorbed, and prices allowed to find their new real values so that the real growth can get traction.

    “Finally, and this was no small part of the rally in European sovereign debt markets, Germany backed off its demand that private investors take haircuts in any future debt issues. Fear of Greek style debt write downs had been a major factor in the dramatic surges in borrowing costs for Italy and Spain; with that fear relieved, markets eased.”

    It’s not that Germany’s demand for private investors to take haircuts was a problem. Many private holders have insurance that can only be triggered by an unambiguous event of bankruptcy. That they didn’t allow the insurance to be triggered has basically invalidated the insurance and put many banks in a difficult position in presenting their credit risk situation accurately to the markets. Net exposure has to go to gross.

    If private holders don’t take haircuts the losses will eventually have to be absorbed by public (i.e. taxpayers) one way or another (think QE and some serious inflation).

  • Luke Lea

    With enough legerdemain it should be possible to find a way to put off the day of reckoning until after the 2012 elections — by which time the major bank’s will have had time to unload their Greek exposure onto an unsuspecting public.

    The trickiest part, I surmise, will be how to bring the ECB into full partner in crime with the IMF and the U.S. Federal Reserve, the goal being to “equitably” divide the pain between European and American taxpayers.

    Once done expect Greece to exit the Eurozone with a minimum of fanfare and for few Credit Default Swaps being called into play. Citibank will be saved to lend another day!

    Am I being too cynical here? Well, these aren’t my cynical ideas — they are the ideas of European bankers I’ve been reading of late — but I hope I’m wrong all the same.

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