Italy: how to ditch the Euro

Many 'Experts' agree that leaving the Euro would have catastrophic consequences for a country like Italy. In particular, (foreign) debts would explode bankrupting the state, banks and companies with debts denominated in Euros.
But a simple solution is overlooked - Italy, or any other country - could simply re denominate these debts as it can do it with any internal debts. There would be an outcry but extreme situations call for extreme solutions.
And anyone who arranges his financial affairs in a way so as not to take this possibility into account can only blame himself. Quite a few years ago - and before the Financial Crash - we said that a narrow spread of BTP to Bunds of just 15 bp or so was not viable and any investor was foolish to hold on to the Italian paper.
So you have been warned!

Governments Have Put the ECB in a Bind

Wrong way round! ECB allows Governments to delay or abandon any structural reforms by bailing them out, keeping rates at absurd levels and effectively stealing from Savers - most of them low or middle income citizens that benefit little from the asset bubble the Central Banks create.
Governments Have Put the ECB in a Bind

ECB blabbering

"Taken together, the ECB's current policy settings are appropriate and are clearly providing the support required to sustain the recovery," Coeure said, adding that support will stay in place "until inflation is sustainably adjusting to our objective."
Well, Benoit Coeure - a signed-up member of the unelected Eurocracy ruling over us and stealing from all hard-working savers in the Eu(rozone) - utters another non-sensical and contradictory statement.
What does he mean by 'recovery'? it probably means economic GROWTH, but then he seems to indicate that inflation is 'their' objective? So would that mean inflation running at 2, 3 or more percent would be 'success', whatever the level of growth?

Are they really stupid at the ECB?

The believe that pushing inflation up to 2 pct will really make one iota of difference to the economic well being of millions of Europeans can only be described as stupid. If anything, workers will be worse off in real terms, as will be savers. So consumption will in all likelihood be on a downward trajectory. With respect to 'structural' reforms, maybe the ECB should first look at itself: what benefit have the people of the Eurozone gained from employing thousands of overpaid jobsworths in the super expensive tower that accommodates them in Frankfurt? Does one notice any difference from when the countries had their own currencies?

PS: Just spotted Bill Gross' opinion about Fed Policy, so I am not alone with my opinion!

Currency Union CAN work without Fiscal Union

Academics, assorted Analysts and Media Commentators regurgitate ad nauseam that Currency Union without Fiscal Union cannot work. Sorry but repeating this does not make it a truth. Admittedly a Fiscal Union would make things easier but the Euro-zone could function quite well without establishing a (technocratic) Super-Government far removed from any democratic control.
The Gold Standard - and the post-Bretton Wood system of fixed exchange rates - worked quite well without Fiscal Union. All it took was discipline on the part of the participating governments. This is what is missing - in most aspects of policy making - these days. The Currency Union is doomed if the member states do not adjust their internal economic and fiscal policies and disregard market signals.
Excessive speculation - magnified by leverage and uncontrolled capital flows - pose a risk as they turbo-charge price signals (falling sovereign bond prices in particular). This is akin to some panicky bodies in a small rowing boat. But decisive changes to policy measures should be able bring markets under control - fiscal adjustment, penal interest rates should quickly give the markets the right signal.
Do not blame lack of Fiscal Union for the problems of the Euro-zone. These have been left to accumulate in a reckless fashion over many years if not decades. Introducing Fiscal Union may douse the smoldering fire - for a while. But if there is no proper fundamental adjustment - remember the Mezzogiorno - patience in some member states that are paying high transfers will run out. In addition even bigger waves of speculation will set in when Fiscal Union looks frayed, funds will pour into the stronger member states until the pressure point is reached and the Currency Union can no longer be maintained. George Soros would relish this Mega-Tsunami if he would still be around at that time.

The European Central Bank’s House of Cards

"Europe is a runaway train with a certain crash in its future." (Frank Hollenbeck, Mises Daily)

Letta's demeaning trip to Berlin

The absurd reality of the Euro-Zone is revealed by the report that the new head of Italy's government is hurrying to make a trip to Berlin (to have his plans approved by Merkel?). Mussolini in his declining years was reduced to a similar humiliation. In the meantime German industry kills off the competition that is locked into the Euro straight-jacket.

Euro-Bonds, Sinn and Soros - the overlooked danger

Always interesting when some heavyweights are fighting it out. My main answer to the problems with the Euro is simple: one should never have embarked on this half-baked - and undemocratic - experiment. But to advocate Euro-Bonds as the solution is overlooking one important risk: what would happen if one of the member countries would want to leave the Eurozone after a large volume of these bonds has been created? Would we see the equivalent of the American Civil War in order to bring a recalcitrant nation to heel if the citizens are unwilling to continue to shoulder the burden created by profligate states?

Spanish Debt - an alternative solution

Given the overwhelming consensus view that Spain will have to go cap-in-hand to the ECB/EU/Troika and ask for a bailout one has to ask if there really is no alternative for EU member states that find themselves in a tight spot. Is it really necessary to impose the costs of any restructuring on the weakest members of society? Why not just impose a unilateral debt restructuring and let the creditors - domestic and foreign - carry a much larger burden of any restructuring? There is no reason why a country choosing to go down that route could not remain in the Eurozone, if anything such a radical measure would make it easier to remain in the Eurozone. Capital flight would be reduced as there would be less fear that an exit from the Eurozone would be imposed in order to solve the debt crisis.

Euro in the last chance saloon

Today's 'surprise' announcement by the figurehead of the ECB, Mario Draghi, that the Euro would be defended with another dose of a highly addictive drug, i.e. paper money in hitherto unimaginable amounts, also amounts to the end of any rational economic policy in the Eurozone. Trying to patch up a wrongly designed currency zone with more and more desperate measures may buy time, even quite a long time, before the next - and terminal - crisis erupts. Banking union, fiscal union etc may all happen - without a shred of democratic legitimacy - but in the end there is no guarantee that no member state of the Eurozone will not some day give notice of its intention to quit - and leave all its obligations behind. This Damocles's sword will from now on always hang over the heads of all investors that have a financial stake in the Eurozone. Like our warning back in 2005 when we argued that investors were deluded to buy Italian government bonds that yielded a tiny spread versus German paper this warning may also sound premature - the Commentariat will certainly pour scorn on it - but investors ignore it at their peril.

Speculators attacking the Euro?

Most sensible observers - apart from the europhile 'Elite' behind the Brussels-Consensus - would agree that the way the Euro was constructed was - apart from being anti-democratic - deeply flawed from the onset. But we are where we are and cannot argue over spilt milk. That the governance of the Euro zone will have to be changed in a major way becomes clearer by the day.
But the discourse in the media - and above all in the blogosphere - is not really focusing at the relatively simple way the crisis can be ended. Too many commentators have a vested interest in seeing the demise of the Euro, be it for ideological reasons, be it out of a sense of 'Schadenfreude' or pure sensationalism (only bad news is news seems to be the motive, just read Zerohedge where is is difficult to find ANY constructive criticism). We do not even want to consider all those great thinkers that have positioned themselves for a collapse of the Euro or some of its member states and want to make hay out of any subsequent turmoil in the markets. Worst of all are 'investment' banks that play all sides - as speculators, doomsayers and 'advisors' to governments and banks that are victim of speculative attacks.
Because speculation is a key contributor to the growing crisis in the Euro zone. Not just in the guise of a hard-nosed hedge fund manager or prop trader but also in the shape of all major investment institutions. They may not be short-term oriented and probably have no axe to grind regarding the survival of the Euro but nevertheless they are knowingly or unknowingly contributing to the destabilisation of country after country by simply taking steps that are beneficial to their own self-interest.
Countries such as the USA and Britain have only survived with an intact (?) financial system because their Central Banks pumped money into the economy at rates that would have been called lunatic before the onset of the Credit Crisis. There is no such tool to stem bank runs on countries that are members of the Euro zone. Greece may have an economy that has been managed abysmally but no one in his right mind can expect a country to survive when speculation pushes interest rates to astronomical levels. A similar mechanism was at the heart of the credit crisis 2008-09 when speculation in relatively illiquid derivatives (mostly linked to ABS and MBS products) created a 'death spiral' in the credit markets that was largely divorced from the underlying reality in these markets.
Stopping the rot at the core of the Euro Crisis would require only the full commitment of the European Central Bank to an all-out effort to push interest rates in ALL member countries to acceptable levels and fulfil its role as lender of last resort to all banks that are threatened by a bank run.

OECD bureaucrats clueless

Reading that the bureaucrats in their cushy offices in Paris are 'pushing' for an increased 'firewall' to protect the Euro from disintegrating and help the Eurozone to return to economic growth one is reminded how clueless these 'experts' really are. They refuse to realise that the introduction of the Euro currency in its present form was a catastrophic error and think that throwing money at the economy is all that needs to be done to correct the cumulative results of 40 years of creeping socialism.

How difficult is it for a country to leave the Euro?

Learned Minds can recite catalogues full of reasons why it is very difficult, even impossible, for a member state of the Euro Zone to abandon the Euro. But all the legal niceties will count for little if the decision is made to cut the Gordian Knot. While to Euro as a practical instrument is quite useful for tourists as well as businesses the boost to the economies to the member states was at best marginal during the past ten years. These days the exchange of currencies is nearly frictionless and very cheap in the day of the Internet - for private people and even more so for business purposes. But the argument that the exit from the Euro Zone would be extremely difficult and take a long time to prepare is difficult to swallow. It should be possible to declare on any weekend that the exit has been decided and that all bank accounts, financial assets and liabilities will be frozen and converted into the new currency from that moment on. Unfortunately, this analysis makes it even more likely that the Euro Zone will lose one of its members at some point in the future because any sane investor or business manager will henceforth take this possibility into account when making decisions.

Euro Summit - what they did not tell you

Scholastic scholars would have felt perfectly at home in the discussions about the Euro and the Euro Crisis. What ALL experts seem to be forgetting is the poor taxpayer and citizen who has no say at all in this. The major contributing factor to the current situation in Euroland has been totally wrong (one might even say foolhardy and/or idiotic) decision making by the 'fathers' of the Euro (who by now all enjoy their pampered life paid out of generous pension the bill for which is picked up by their hapless victims). Without the strainghtjacket of the Euro individual countries or banks would have gone bankrupt by now and life would go on without creating too much systemic danger for all industrial countries.

Bloomberg: Sandblasted 'Beauty' and Property 'Investor' solve Euro Crisis

When someone with no background or experience in Europe pontificates about the Euro Crisis one wonders what the point of Business Television is. Maybe Mort Zuckerman plays golf with Michael Bloomberg but otherwise we are at a loss what his special insight about the Crisis should be. Maybe the 0.001 % really know something that could help solve the World's problems - or maybe they are just part of the problem?

Fiscal Union - only precursor to an even bigger crisis

We want to keep this post short and to the point: those members of the Commentariat who think that Fiscal Union will solve the current Euro Crisis will be in for a rude awakening - in a few years time, but maybe much earlier. A chain is only as strong as its weakest link, and there are quite a few weak links in the Euro-Chain. Even mighty Germany (as those on One Euro jobs there know already) is not as strong as it might appear. Its performance is strong only because the other countries are weak, bit like the conundrum in the currency markets where a strong currency means that the other side of the trade is by definition weak). Debts in Germany are also sky-high, especially if you include all private and bank debt and - most importantly - unfunded pension promises etc. How the poor German taxpayer, squeezed that he is by a relatively efficient (and merciless) tax collecting system, is supposed to carry the burden of all the freeloaders in the Euro Gravy train remains to be seen. I would not put my money on it except in very short term trades.

Sarkozy: a flawed mind?

Anyone who can endure a certain amount of (intellectual) pain would do well to have a close look at the French President's speech to party loyalists held in Toulon on December 1st. While the French are often said to be particularly rational followers of the 'Cartesian' tradition we were aghast at the incoherent reasoning cobbled together in this effort to explain and possibly solve the current crisis in the EU. If the analysis is wrong the solutions cannot be the right ones and while a temporary patching up of the Euro structure might well work it gives little cause for longer-term optimism.

What happens if a country leaves the Euro Zone?

An article in the Financial Times compares a possible break-up of the Euro Zone with the period after the end of the old Soviet Union. We think that contrary to some observers Greece would not announce any date for the Switchover - it would all happen on one weekend, without any warning. Monday all accounts are denominated in Drachmas and Banknotes are stamped over. One little detail, what happens to bank notes circulating outside Greece that have been issued in Greece (all Euro notes can be traced to the issuing country). Whatever the likely disturbances, lower quotes for Drachmas would start a stampede to book holidays in Greece, buy property etc.

European Bond no panacea

The Eurocratic 'Elites' seem to think that the issuance of a Bond guaranteed by all member states of the Eurozone would be the magic bullet that solves the sovereign debt crisis in Euroland and saves the Eurozone from breaking up. This may well be the case - for a while. But as economic and fiscal problems get papered over for a few more years the underlying tensions will only increase while those responsible for policy at the moment will have started to enjoy their well-padded retirement at the expense of their hapless taxpayers. The crunchtime will come when one of the states that have pledged to guarantee those 'Euro-Bonds' will no longer be able (or willing) to suffer from the burden of debt service. WE have (unfortunately successfully) argued back in 2004 that to accept bond spreads on Italian bonds that are just a tiny amount above the yields offered by German Bunds is a highly risky investment strategy. We hope - but are not confident - that we do not turn out to have warned in vain again.

Financial Chaos without European transfer payments?

When even seasoned financial commentators that usually display a certain amount of independent thinking argue that financial chaos is certain if Germany (and other 'northern' Euroland member states) don't continue to subsidise countries such as Greece, Ireland and Portugal one knows that the last vestiges of rational economic thought and any sense of democratic governance and financial responsibility is on the way out. Letting Greece or any other country go bust would certainly create difficulties in the short-term but the humongous financial resources (including central bank money created ex nihilo) would be much better applied to paper over the cracks in the financial system. In the long run this would be cheaper for the 'North' and the 'South' would either learn the lesson of good housekeeping once and for all or continue to slide further down the slippery slope of relative (and maybe absolute) decline in living standards.