Saturday, May 08, 2010

Web of Debt in Europe....

The above picture is from NYTimes[Link]. This picture along with Paul Krugman's article on Europe[Link] appeared in the Straits Times today.

Default of any country is not an option because of the inter-linkages. They either stand or fail together. A sovereign debt default will mean govts will have to bailout the banks holding the debt unless they are willing to see the banking system collapse. So they are better off monetizing the debt. Another approach is for the ECB to guarantee the debt if the countries are willing to accept certain fiscal conditions laid out ....meaning they will monetise it only when countries can't service it...that will buy plenty of time.
Given the size of the debt, there aren't many ways to solve this.

6 comments:

skeptic said...

http://www.irishtimes.com/newspaper/breaking/2010/0508/breaking5.html

Update: It seems they are going to create a euro-zone fund and get the ECB to buy bonds.

Lucky Tan said...

Thanks Skeptic.

That will be good news for equity investors. However, I did not find the same news in Hloomberg ...maybe the Irish reporter has a direct link to an EU committee member. Hopefully can get some confirmation soon.

I think the smart money did cover before the weekend. The Euro actually held up throughout the day and Singapore/Hong Kong stocks fell much less than expected. But definitely there will be huge open short positions for, say, the HK futures which is a favorite for hedge funds.

The general belief is they will do a half-measure which will allow speculators to drive this turmoil for another few weeks - they were slow to rescue Greece until they were forced. Also early reports was that the German member Axel Weber was strongly opposed to monetising the debt - he even said that saving the Euro & EU may not be worth doing everything. If that was a trap, it was a clever one.

I think speculators pushed the European stocks abit too far down more than 4% in one day and 16% in less than a month. George Soros once wrote that you can use the stock market to create a recession if you can bring it down more than 20%...that will create reflexive effect of confidence loss. The EU leaders had to act or they would have a big ugly mess within a week

Anonymous said...

If money is the problem then creating plenty of it is the only way to solve it. So what we will see is good assets will inflat rapidly. Bad assets will deflat equally rapidly. The choice is clear. That is why property rocketed in some countries while it collapsed in others.

skeptic said...

"George Soros once wrote that you can use the stock market to create a recession if you can bring it down more than 20%"

He doesn't have to say so. He has done so!

I have been following his positions online. He said that gold is the ultimate bubble but he still buys it.

Anonymous said...

Mr Lucky

The EU works differently.
That does not mean they are slow.

Having said that, the eurozone fund is insufficient.
Soros, Paulson, JP and GS have way more $$$.

I hope the EU have a few more aces up their sleeves.
Else they better get used to kissing yankee arses.

Anonymous said...

time to buy more eu products...lv, gucci, prada, bmw, merz, ferrari etc