Thursday, August 18, 2011

Collapse of Europe to Spark a Global Depression?

Yahoo Daily Ticker interviewed Rupal Ruparel of London-based think-tank OpenEurope, stating End Game Approaching in Europe: No Way Out But Debt Restructuring:

For two years now, Eurozone leaders have tried to deny reality, concocting one temporary bailout scheme after another in an effort to sweep Europe's budget problems under the rug.

But this game is nearing its end, says Rupal Ruparel of London-based think-tank OpenEurope.

A crisis that began in countries like Greece that seemed too small to worry about has now spread to countries like Spain and Italy that are big enough to take the whole Eurozone down. The only way to actually solve the problems, says Ruparel, is to acknowledge the facts: "Austerity" programs won't help countries pay back their debts. Either the whole Eurozone has to combine its fiscal spending--a solution in which German taxpayers would pay for Greece's deficits--or the debts have to be restructured.

Ruparel believes the "fiscal unity" solution is politically untenable. So that leaves restructuring.

A planned restructuring will be painful, Ruparel says, but it will be a lot less painful than a market-forced one. And the sooner Europe's leaders acknowledge this and get cracking, the better.

You can watch the video clip below at the end of my comment. Others worry that vacillation among European leaders will lead to serious financial and economic dislocations. George Soros thinks a euro collapse could spark global depression:

Billionaire investor George Soros said a collapse of the euro may spark a global financial crisis in a “new Great Depression,” L’Hebdo magazine reported, citing an interview.

“It seems to me that one still doesn’t understand what would happen if the euro collapsed,” Soros told the Swiss magazine in an e-mailed pre-release of tomorrow’s edition. “It would lead to a banking crisis that would be totally out of control.”

He also said Europe’s future hinges on Germany, which should “dictate its solution” to the region.

The Globe and Mail, citing an interview with German publication Der Spiegel, went into more detail on why Soros believes the crisis is not over:

Asked to compare the 2008 crisis in the U.S. subprime market with the current European crisis, Soros said “this crisis is still the continuation of the same crisis.”

Soros went on: “The method the authorities rightly chose three years ago was to substitute the credit of the state for the credit in the financial system that collapsed. After the failure of Lehman Brothers, the European financial ministers issued a declaration that no other systemically important financial institutions would be allowed to fail. That was the artificial life support; it was exactly the right decision. But then [German] Chancellor [Angela] Merkel stated that such support would only be granted by each EU member state individually, and not by the European Union.”

But the European Union must act as one, according to Soros, by issuing its own bonds–Eurobonds–guaranteed by the Union as a whole rather than individual countries.

That poses a problem, Soros told the publication, “because each European country remains in control of its own fiscal policy, and you have to rely on the country to meet its financial obligations.”

The only solution, according to Soros, is for Germany to take the lead.

“The future of the euro depends on Germany. This is the point I really want to drive home. Germany is in the driver’s seat because it is the largest country in Europe with the best credit rating and a chronic surplus. In a crisis, the creditor always calls the shots. Sure, this is not a position Germany or Chancellor Merkel ever desired and they are understandably reluctant to embrace it. But the fact is that Germans are now in the position of dictating to Europe what the solution to the euro crisis is.”

If the Germans allow the Euro to fall apart, it would be catastrophic, Soros warns.

“If the euro were to break up, it would cause a banking crisis that would be totally outside the control of the financial authorities. So it would push not only Germany, not only Europe, but also the whole world into conditions very reminiscent of the Great Depression in the 1930s,” Soros said.

Soros further argued China will defend the Euro, because it wants a viable alternative currency to the U.S. dollar. As a result, he says, he won’t short the Euro. In fact, he says, that is why the Euro has been so strong relative to the dollar during the European crisis “There is a mysterious buyer that keeps propping up the euro,” he said.

Among other subjects, Soros argued that credit default swaps (CDS) should be banned because “it is a very dangerous instrument.” Soros’s statement echoes a famous earlier comment by Berkshire Hathaway chairman Warren Buffett who referred to CDS as “financial weapons of mass destruction.”

I know first-hand how CDS have been misused among financial institutions. And as Diane Urquhart pointed out on my blog three years ago, even pensions got into the CDS game and suffered enormous losses.

CDS are great for elite global macro hedge funds and big bank prop desks, but it's been a total disaster for the global economy. I'm not against derivatives but th emisuse and abuse of these products, coupled with low regulations, has wreaked havoc on the global financial system.

So will Europe collapse? I don't believe Germans, Europeans , Americans or the rest of the world are ready to find out what happens if Europe collapses. The repercussions will be devastating as banks stop lending to each other and global credit seizes up once again.

I agree with Soros and others, there is only one solution to this European debt crisis, the European Union must act as one by issuing its own bonds–Eurobonds–guaranteed by the Union as a whole rather than individual countries. Germany is in a tough spot: either way it will lose big.

But the reality here is politicians are acting much like individuals afraid to open their credit card bills. It's time to face the music and deal with the crisis forcefully. And please excuse my vulgarity, but European politicians better heed this advice from someone who knows exactly what's going on behind the scenes: you have to fuck hedge funds and big banks engaging in useless and abusive speculation on sovereign credit once and for all. Unless you do that, by implementing a long-term solution, then this crisis will linger and cause untold economic hardship, not just in Europe, but throughout the world.

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